Video: The Impact of Climate Change on Real Estate
June 23, 2022
Video: The Impact of Climate Change on Real Estate
In this Experts with Impact series episode, FTI Consulting’s Glenn Brill, a Managing Director in the Real Estate Solutions industry practice, discusses the impacts of climate change specifically as it relates to the real estate industry. Mr. Brill has been closely following the impacts of climate change on real estate investing and how the industry is responding to the challenge.
The Real Estate Industry’s Response
The real estate industry (developers, operators and investors) is taking climate change very seriously. The built environment is a long-life asset, and the rate of climate change may be poised to increase at a more rapid rate in the near term and cause periodic economic disruptions in local markets. How well an investment cash flow can recover from a climate event and sustain itself is of increased importance to preserve its longer-term value. For the industry, it’s a combination of offense and defense – a combination of opportunism and risk mitigation as government regulations promote a climate friendly built environment.
ESG & Real Estate
Increasingly, a real estate asset’s ability to sustain itself and reduce its impact on the environment is part of the investment decision, as institutional capital increasingly emphasizes ESG values as part of their investment mandate in response to market demand from users, occupiers, consumers, as well as their own investors for a sustainable built environment. Investment performance remains paramount and market demand for efficient 21st century building design and new construction is accelerating as investors/developers and operators seek to create competitive advantages that result in higher rent and lower operating expenses, and value creation that outperforms the overall market. Conversely, older buildings with outdated building systems may reach obsolescence much faster and have their hands full playing catch-up with new construction. The feasibility for retrofitting many older buildings from a constructability and cost perspective may be prohibitive.
Roles of Government Regulation
Real estate assets are always impacted by government regulation and this instance is no different. The need to mitigate climate change is prompting public policy to redefine and promote requirements for the built environment. It’s largely the standard federal, state and local government toolbox, including land-use/zoning, building codes, and public benefit incentives and taxation. For instance, in the short-term, federal flood insurance programs for waterfront property may attract less funding and reduce benefits as beachfront community’s experience more drastic storm events and need to be rebuilt with more frequency – disincentive for rebuilding what was destroyed. In the long-term, communities may alter land-use patterns to accommodate more efficient flood mitigation strategies to reduce their infrastructure/public service costs, as fiscal revenue may longer be able to support higher cost climate resistant infrastructure and services.
Advice to Owners of Waterfront Property
If one owns a waterfront property, one might say it’s on a land lease with mother nature with an unknown expiration date. One future outcome may be increased building density (bigger waterfront buildings), as needed to finance the cost of climate resistant building design and waterfront infrastructure in otherwise low-rise residential communities. Public benefit incentives and disincentives in the form of community grants, tax credits/rebates, BMR loans, and likely carbon taxes in the future are increasingly designed to direct private sector investment toward a sustainable built environment with the potential to incentivize and scale-up an innovation economy around sustainable building technologies. Mr. Brill believes that venture capital is responding to market demand and public policy (largely in the form of economic subsidies) with an appetite for technologies that drive positive change, and considering the scope of real estate’s significant impact on climate change, the potential is for the next great surge in innovation and economic investment.
Take-aways on Climate Change
People can argue about what caused climate change, but it’s a fact and part of the future. We need to recognize real estate as a sustainable long-life asset and seek opportunities designed to respond to market demand for climate change mitigation – both assets and building technologies. It’s a wellness strategy for people, the planet and good business.
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