Climate change is increasing the frequency and intensity of weather events, resulting in catastrophic losses – more than $3 trillion globally between 2010 and 2020 – from droughts, floods, storms and wildfires. Most major economic hubs are in coastal locations, river deltas or other high-risk areas, and house more than half the world’s population. Key business districts are often in the most at-risk area – the waterfronts. High value residential developments, representing a key part of the local tax base, are likewise in waterfront districts.
Investors, with such huge capital at stake in cities, are increasingly reluctant to commit to major development without detailed local market-level risk assessments and resilience analytics and are citing the pressing need for funding to develop resilient infrastructure.
While the weighting of local climate risk varies from investor to investor, our research demonstrates that climate risk is having a greater impact on investment analysis and decision-making overall. Indeed, some investors revealed they are starting to either ‘press pause’ on new investments or, in some cases, pull back from some local property markets due to lack of climate resilience. Investors broadly agree that consistent and reliable information about city-scale risk is required; they want to better understand the physical risks facing a city, the ability of existing infrastructure to mitigate these risks and the planning and financing of new resilience infrastructure and capacity of city governance to manage future risk.
The models and metrics needed to assess local climate risk are in their infancy. Benchmarking cities for climate risk and resilience is a challenge, but there will likely be significant progress from the industry on obtaining this much-needed data, which will result in a more informed decision-making progress.
To date, most financial impacts of climate change are mitigated by insurance, disaster relief and public sector accounting conventions. These alone are unlikely to address the climate-related risks ahead. A longer-term solution for the most affected regions is likely to encompass a collective public and private approach informed by market selection decisions of employers, residents and institutional investors.
Coordination with policy makers, resilience officers, investors, and the insurance and valuation industries is vital in linking market-scale analysis with asset-level physical risk assessments. This city-scale information will also help city governments to create a more robust business case for major resilience measures, alongside more transparent accounting for the costs of catastrophic climate events. Business cases will include the economic benefits of resilient infrastructure projects, such as job creation and retention, preservation of the tax base and avoided losses.
The business intelligence and data management tools required to assist investors in making decisions about these factors continue to evolve. This evolution, combined with the depth of real estate experience and expertise found within the industry today, should put investors in a much stronger, informed position to improve the development of their portfolios and manage these growing risks.
The ULI/Heitman report ‘The Climate Risk and Real Estate: Emerging Practices in Market Assessment’ can be downloaded at: http://uli.org/climateriskmarketassessment