Climate change poses clear risks to the real estate sector.
In addition to the physical and social impacts of natural disasters, growing regulatory pressures and changes in market preferences are impacting investment performance.
These threats have adverse implications in every aspect of the industry, from increasing prices in the real estate market to the decline in popularity of real estate properties in specific regions.
Climate Change and Real Estate
Climate risk is classified: Physical Risk and Transition Risk. Physical Risk is extreme weather events and long-term shifts in climate. On the other hand, Transition Risk is a change in policies, practices, and technologies as organizations shift toward a low-carbon economy.
The real estate sector is particularly vulnerable to the physical risks posed by climate change.
The sector’s sensitivity stems from its dependence on large structures: schools, hospitals, airports, hotels, office buildings, prisons, hazardous material sites, waste disposal sites, nuclear reactors, and historic buildings.
Real estate assets are relatively illiquid compared to other types of assets. Real estate is also tied to long investment cycles, which makes property-related returns naturally more in peril to long-term weather trends.
How climate change affects real estate:
- Sea Flood and Real Estate: Rising sea levels are responsible for substantially altering the natural geography of coastal areas; this puts communities and ecosystems in greater danger of flooding and storm surges. A 2018 Union of Concerned Scientists study estimated that more than 300,000 coastal homes will be at risk of regular flooding by 2045. First Street Foundation found that between 2005 and 2017, flooding erased nearly $16 billion of real estate appreciation in coastal areas from Maine to Texas. Put another way, were it not for flooding, coastal properties would be worth $16 billion more.
- Drought and Real Estate: Drought causes dry vegetation and lower water levels in lakes and reservoirs. Furthermore, long-term impacts on land subsidence, seawater intrusion, and damage to the ecosystem are more costly to manage in the future. In California, extreme drought has been going on for so long. ⅔ of the USA’s agricultural products like fruits, vegetables, and nearly a hundred percent of its walnuts, pistachios, and other nuts, are positioned in the State. Drought conditions drive people to move out of the state and discourage new residents from moving in.
- Extreme High Temperatures and Real Estate: Higher temperatures lead to more extreme weather events, from massive hurricanes to wildfires. These incidents are making it more challenging for the real estate sector to manage the costs and conditions of property yearly. Without intervention, extreme heat can be a stressor, reducing retail sales at outdoor malls, changing recreation and travel choices, and otherwise influencing consumer behavior.
- Extreme Precipitation and Real Estate: In most European cities, climate change is increasing the frequency and the intensity of heavy precipitation events, threatening urban infrastructure and increasing flooding. Without adaptation measures and mitigation strategies at the site level and the city level, these assets will suffer from increasing property damages and potential business disruptions due to more frequent and severe rainstorms destroying infrastructures and properties.
- Strong Winds and Real Estate: Wind can also be accompanied by hurricanes, tornadoes, cyclones, microbursts, or downdrafts. High winds can cause hazards to your property and surrounding areas – hazards such as fallen branches, uprooted trees, and torn-down power lines.
- Forest Fire and Real Estate: Wildfires and droughts have caused $120 billion in damage over the last 30 years. In 2020, 2 million acres in California were impacted by nearly 10,000 wildfires, making it the largest wildfire season in modern history. Research conducted by the USDA concluded that demand for houses located near wildfires decreases immediately when forest fires are experienced more than once and that demand decreases more after repeated wildfires. Hence, many homebuyers do not want to live in areas with repeated wildfires, and probably homebuyers purchase homes in high-risk areas without being fully aware of the actual wildfire risk.
- Hurricane and Real Estate: A study in commercial real estate investors conveyed that the loss in commercial real estate value appears to last up to 5 years after a hurricane makes its landfall, and is likely a result of higher risk premiums and lower tenant demand after an occurrence of a hurricane. It also examined the impact of hurricanes on properties owned by institutional investors. Hurricanes also decline the demand of home buyers from buying properties in severely hit areas.
- River floods and Real Estate: Research looking at the residential market in Germany and Finland show that properties in flood-prone areas are sold at lower prices compared to properties without flood risk. Studies show varied relationships between flood mapping and property values; the majority indicate that floodplain disclosure reduces the real estate value anywhere between 1% – 4% (a relatively small amount). Whereas actual flood events tend to decrease housing values from 18% – 25%.
Climate Intelligence and Real Estate
Various studies on climate risk and real estate pricing come with limitations to their analysis and the results are sometimes in conflict with similar research. Because of this, the transmission channels through which pricing and value are affected by climate risks are cloudy. Valuation practices, which are largely driven by lagging indicators, suffer from a paucity of specific climate risk evidence and available data. Ultimately, access to information on climate risks and mitigation measures is a fundamental factor in value assessment and pricing.
Artificial intelligence in real estate is vital as accurate information from reliable data leads to greater awareness, belief acceptance, and integration of climate impacts on prices achieved.
What is Climate Intelligence?
Climate Intelligence gathers and analyses a massive amount of data through machine learning and artificial intelligence (AI) for sustainable solutions against climate risks. Physical risks cause many problems for real estate properties depending on their location, composition, and layout. Higher structures, for instance, are more susceptible to strong winds while open-plan complexes are more exposed to heavy rain. Both scenarios lead to increased wear, which eventually inflates maintenance costs.
Climate Intelligence can accurately measure and manage the impact of climate change through run cost predictions involving extreme weather events to better understand the potential impact of climate risks on revenue, operating costs, and capitalisation rate.
Additionally, CI can avoid the uninsurable via quick access to information on climate hazards and the cost of their aftermath in the next years and decades to come. Furthermore, CI can also attract more buyers and investors with its ability to publish listings with data-backed climate risk scores and maintenance cost portfolios. On top of all these, CI can integrate climate actions into your business strategy, sales process, and customer service to emerge as a leader in today’s green economy.
Conclusion
Home prices are seeing dramatic shifts due to climate-related impacts: Areas with an increased rate of damaging events are becoming less attractive, and prices are dropping. However, climate risks for real estate are not just a threat to residential properties. As communities are threatened by climate change, essential land and buildings will be compromised. Fortunately, with the breakthrough in climate sciences, Climate Intelligence can help real estate owners and investors to mitigate climate risks.
CLIMATIG can help real estate players to identify mispriced assets, find resilient properties, and maintain existing assets amidst climate hazards. Visit CLIMATIG to find out more.