Last month, we explored climate risk assessments, which are growing in importance in real estate transaction due diligence, maintaining and repositioning current commercial and multifamily properties, and guiding the design of new buildings. To recap, climate risk assessments consider both physical and transitional risks. Physical risks are weather-related risks worsened by climate change, and transitional risks relate to climate-induced changes in the economy or public policy. Investors, regulators and insurers will increasingly be looking at the risks that climate change poses to investments, including commercial real estate.
Since the writing of last month’s column, we have witnessed more unprecedented events, including extreme heat waves across much of the country, deadly and destructive flooding in Tennessee after 17 inches of rain fell in just 24 hours, and the devastation of Hurricane Ida, both in Louisiana and in the Northeast. The National Oceanographic and Atmospheric Administration’s (NOAA) National Centers for Environmental Information (NCEI) indicates that there has been a 70% to 90% increase in total inflation-adjusted losses from weather events in the United States every decade for the past four decades, and the trend is continuing.
Real estate investors, and their lenders, will want to consider these risks and the associated impact on potential income and future property value as part of the due diligence before acquisition. Right now, there is no standardized approach or set of uniform assumptions established for performing climate risk assessments, but these are in development and resources are available to guide the process. Prudent real estate investors will want to stay ahead of the curve and integrate some level of assessment into their acquisition process now. Even if the potential risks posed by climate change don’t outweigh the rewards offered by a particular property, it is wise to budget for capital improvements to increase resilience, mitigate risks, and reduce maintenance and operating expenses.
A physical risk assessment starts with identifying the most likely regional and local hazard events. This involves both looking at recent historical data on the frequency and severity of hazard events, and interpreting the range of change that climate models predict. The assessment considers the materiality of expected climate-related impacts, evaluating through scenario analysis how much these impacts might affect the subject property. For the risks that are considered material, a property risk assessment looks at specific areas of weakness apparent in the site and structure based on the configuration, age, and condition of components and systems. For example, some buildings in New York suffered water damage from Ida despite having sound roofing. The unusual intensity and angle of rainfall (sideways rain) from the storm drove water intrusion in parts of the enclosure not designed or maintained for that type of exposure. Identifying the potential vulnerabilities from likely hazard-event scenarios is critical to planning for and mitigating risks.
For properties currently held, assuming climate change does not pose an existential threat during the anticipated hold period, planning and budgeting for capital improvements to boost resilience will reduce risks, cut operating expenses, increase tenant desirability, and preserve or increase property value at the time of sale. These upgrades could include improved energy efficiency, enclosure upgrades (for thermal performance, high wind, combustibility or other local risks), on-site energy generation and storage, water efficiency and reuse, or flood mitigation. This could also include passive survivability measures, such as daylighting, natural ventilation, shading and other measures to maintain habitable indoor conditions during an extended power outage. Similar considerations should be given to the design of new buildings, increasing their resilience and long-term value.
The integration of energy efficiency, renewable energy systems and other carbon emission reductions not only addresses physical risks, but also reduces transitional risks. Currently there are 36 major cities in the U.S. with some form of energy benchmarking ordinance. This list is expected to expand, along with the addition of requirements and penalties for non-compliance, and other state and federal requirements are likely to follow. Strategic investments now in energy efficiency and carbon emission reduction measures will reduce the cost of future compliance efforts and provide more immediate returns through reductions in utility expenses.
The investments required to achieve energy efficiency, resilience and climate risk reduction in existing and new buildings can range from insignificant to substantial. However, even when significant capital investments are required, the cost of not acting can be greater, and thankfully there are resources available to make these investments possible. For example, Commercial Property Assessed Clean Energy (C-PACE) programs are active in 26 states (and enabled in 11 more), that provide low-cost, long-term financing to covers energy and resilience retrofits in existing buildings, or take the place of more costly mezzanine debt in the capital stack to offset premiums in new construction. C-PACE financing has contractual and tax advantages over traditional loans, and it easily transfers to new ownership, along with the long-term benefits of investments in climate risk reduction. Additionally, many locations have utility incentives or tax credits that offset the costs of energy efficiency improvements that also reduce risk and increase resilience.
The recently released UN Intergovernmental Panel on Climate Change (IPCC) report makes it clear that the effects of climate change are already here and will increase. Urgent action is needed to both reduce the causes through decreased emissions and limit the human and financial risks through enhanced resilience. Buildings and associated infrastructure present a significant opportunity to reduce climate change causing emissions, and they are also central to the creation of resilient built environments that will support thriving communities and economies long into the future.
Alan Scott, FAIA, LEED Fellow, LEED AP BD+C, O+M, WELL AP, CEM, is an architect with over 30 years of experience in sustainable building design. He is a senior consultant with Intertek Building Science Solutions in Portland, Ore. To learn more, follow Scott on Twitter @alanscott_faia.