Will Climate Change Concerns Affect Real Estate Investment Strategy?

Phoenix’s real estate market, like much of the Sun Belt, has been hot for quite some time. By June 2022, Phoenix’s office, retail and industrial investment sales totaled $4 billion, according to Colliers. In 2021, Phoenix experienced record commercial real estate sales and continued interest in the city from local, national and international investors. Colliers reports that Phoenix is ​​posting top-notch jobs, strong home sales, rising land prices, and stable rents. “New investors come to Phoenix every week to find out how to invest,” the brokerage said in a recent report.

phoenix is ​​americath It’s the most populous city and hot market, but it’s also hot in other ways. According to one report, Phoenix and Tucson, Arizona, are her two cities that have warmed the most in the United States over the past decade. In Arizona, average summer temperatures have risen 1.8 degrees Celsius since the 1970s, and the combination of hot and humid weather has increased the number of “dangerous days” when being outdoors for even short periods of time is dangerous. Phoenix is ​​projected to see 146 hazardous days per year by 2050. Tucson already has 24 more days above 100 degrees Fahrenheit on average per year than in the 1970s, his second-largest increase of any city in the United States. Continued heatwaves in Phoenix and parts of Arizona could lead to further droughts that could make life miserable for decades to come.

In 2020, nearly 200 people died in Phoenix due to extreme heat. Over 100 degrees Fahrenheit for 53 days, making it the city’s hottest and worst summer on record. “2020 has been a glimpse into the future. By 2050 or 2080, we may have a normal summer, so we need to be prepared to make Phoenix livable and thriving.” Response and Mitigation Office .

Many cities, such as Phoenix in the United States, are increasingly thinking about the effects of climate change, such as extreme heat. But the question is when will these effects start to affect real estate investment? And are they already starting to influence investment? The answer is mixed. In general, he said, real estate investing has a 10-year horizon, so it may not make sense for investors to worry so much about the looming climate crisis in places like Phoenix, at least for now. I can’t. But some experts say that by 2030, a harsher impact will be felt, leading to a potential decline in value. Also, unless an investor explicitly changes properties in the short term, the effects of extreme heat and drought in a city like Phoenix must be considered.

burn like a phoenix

Phoenix is ​​just one case study. Northeastern, mid-Atlantic, and southeastern Florida and coastal regions may already be experiencing changes in property values ​​due to sea level rise due to climate change. A climate change research organization called the First Street Foundation reports that house prices in New York, New Jersey and Connecticut fell by $6.7 billion between 2005 and 2017 due to flooding associated with rising sea levels.

Phoenix and Arizona are concerned about extreme heat and drought that could lead to climate change. Phoenix building owners and government officials are already doing everything they can to mitigate the impact. Many buildings in Phoenix now have cool white roofs that absorb less heat, and more and more buildings are electrifying their heating and cooling systems to reduce their use of fossil fuels. Many glass-enclosed offices in Phoenix use an external shading system placed like a skin on the outside of the building to reduce overheating issues and peak cooling loads. Some Arizona building owners start cooling early in the morning on the hottest days of the year to supercool their buildings during peak heat hours.

Urbanization and building concrete infrastructure is one reason Phoenix and many American cities are hotter than surrounding areas. This phenomenon is known as the urban heat island effect and has been well documented for many years. Phoenix officials believe high-tech and low-tech cooling technologies and solutions, such as planting more trees and installing cooling canopies, can make the city more livable. But considering how hot it is already and can get hot soon, it’s still hard to tell. can keep. But extreme changes in climate can create breaking points. Harvard His Business His School Senior Lecturer John McCommer said: “I think the exit will be slower and more gradual.”

Macomber stressed that while the wealthy in Phoenix will be fine, poor residents, especially those who are homeless, are likely to suffer the most. He also said he thinks it will go down in 10 years. Despite McCommer’s opinion, the Arizona and Florida real estate markets are showing consistent growth.

Many real estate investors who flock to Phoenix may not be thinking about climate risks because of their short-term thinking, but that changes with organizations and investors with long investment timelines, Macomber said. Hospitals and universities are examples of organizations thinking about climate risk. For example, “Arizona State University definitely thinks about heat and climate impacts in every building,” Macomber told me.

short-term thinking

Commercial real estate database and research providers are also increasingly considering climate change risks. For example, Moody’s REIS has added climate risk scores to its analytics platform. The property database ATTOM has begun including climate change information in property-level assessments of the five hazards (wildfire, flood, heat, storm and drought). ATTOM evaluates properties with ratings from 0 to 100 for five climate hazards, projections continue through 2050, and risk data is updated quarterly. Sean Mooney, ATTOM’s vice president of product, said:

But is anyone using data in commercial real estate? So far there doesn’t seem to be much appetite for it. A Moody’s study found that many developers in Miami, a potential climate change risk city, have yet to integrate climate risk analysis into their property valuations. Miami Metro had the highest percentage of properties exposed to flooding between 2015 and 2019, but also the highest amount of new space added to inventory during this period.

Reports from organizations such as the Urban Land Institute (ULI) are urging property investors to start thinking more about the future of climate change. According to a recent report by ULI and property management firm Heitman, climate change could trigger a significant shift in real estate demand. The report recommends that real estate investors build their capacity to assess and manage market-level investment risks and understand the climate change adaptation needs of their key markets. Ed Walter, Global CEO of ULI, said:

The alarmist alert has yet to change the real estate market. Phoenix and other places with assumed climate risks are hot in the short term, and thinking too far ahead doesn’t make much sense for many. Federal, state, and local climate regulations, such as the one you are aiming for, must also be considered. But climate change politics is a mess, and regulation development and implementation are, for the most part, slow.

Harvard’s Macomber doesn’t expect many US governments to organize much about the climate change crisis. ‘ said Macomber. “But both sides are working with different information. Who is working on which climate model? They are starting to put risk figures on real estate assets, which are depreciating.”

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Insured losses from natural catastrophes such as wildfires and hurricanes have surged 250% over the past 30 years, according to a report from consultants Capgemini and financial industry group EFMA. The increasing severity and frequency of this climate-related threat is causing insurers to rethink their approach to insurance underwriting, resulting in lower affordability and availability in disaster-prone regions.

If a building owner is not covered by insurance in the U.S. private market, they will have to seek coverage through a state-sponsored insurance company or rely on funding from FEMA and other government agencies without insurance. It is therefore easy to see how continuing to rebuild and invest in areas with significant climate risk becomes unattractive when insurance money flows stop.

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movin’ out

Real estate investors seek markets and metropolitan areas with growing populations and vibrant economies, which may also be impacted by climate change. There are multiple reports that climate change is already happening in the US and is expected to get worse over time. When a wildfire, hurricane, or other disaster destroys a home or business, people have to move, either temporarily or permanently.

Worldwide, weather-related disasters displaced 30 million people in 2020, and wildfires displaced more than 1 million Americans from their homes, according to the Internal Displacement Monitoring Center. Prominent examples of climate change are seen in Louisiana and New Orleans. At least 70% of New Orleans’ population left the city just before and after Hurricane Katrina, and some residents have yet to return.

New Orleans has made a painstaking recovery since Katrina, but today the city is still home to about 60,000 fewer people than it was before the megastorm. Louisiana became the first U.S. state to see large-scale climate change due to families and people choosing to move to higher ground after years of large-scale climate change rather than all at once. may become.

The same could be true for Phoenix, Arizona, and other cities as temperatures continue to rise and quality of life declines. As demand for real estate dwindles, so do property values, cooling the once-hot real estate market. Many real estate investors may not be thinking this far into the future and are simply looking to capitalize on Phoenix and other hot markets that offer high returns in the short term. But that could change as the so-called climate crisis intensifies, with insurance premiums soaring, asset management costs and losses rising.

Currently, only a handful of real estate investors are taking climate risk into account using data from property research firms and climate models, but this could be a sign of what’s to come. Buildings can only run air conditioners for a very long time and can continue to rebuild after a disaster, but there is ultimately a breaking point. While it doesn’t appear to be influencing the decision, there is a growing number of stakeholders betting that the market will begin to reshape in the near future.

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