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🌳 Assessing Real Estate Climate Risk

🌳 Assessing Real Estate Climate Risk

Why investors should be thinking about climate risk and how they can profit

Launch Letter is a weekly newsletter that breaks down real estate trends and topics. Subscribers include brokers, developers, industry executives, and investors. If you are not already a subscriber, sign up and join the others who receive it directly in their inbox each week — it’s free.

Here’s what you will learn in today’s email:

Problem: Investors need to pay attention to climate risk
Big Idea: Why assessing climate risk should be a bigger part of your real estate strategy
Charts and Data: Exploring the statistics of climate risk
Opportunities: How developers, investors, landlords, and entrepreneurs can take advantage
Players: Top investors, VCs, developers, and companies in the space
Predictions: Stay ahead of the curve with these climate risk insights
Key Takeaways: How to get higher returns and de-risk your investments

👉 Problem

Climate risk in real estate is a growing problem and often overlooked by investors.

Severe weather events are increasing and can lead to significant financial and economic losses from wildfires, floods, droughts, and severe storms.

⚡ Big Idea

While we previously explored climate tech's role in the built environment and the opportunities to retrofit existing buildings, this report focuses on climate risk and strategies to mitigate those risks and profit in the long run.

Climate change has been a growing concern for real estate investors and developers, but it is one that most still aren't looking at - while 90% believe its important, an estimated 40% of institutional players are not yet assessing climate in their portfolio.

If you think you are covered with current FEMA flood maps, think again. They have been shown to be out of date and greatly underestimate risk.

Understanding the mispricing of the real estate market due to climate risk presents an opportunity to create outsized returns.

There are two major risks when discussing climate risk - physical risks and transitional risks.

Physical Risk

Physical risk refers to the direct physical impacts of climate change on real estate assets. This includes damage to properties from extreme weather events such as floods, fires, and other climate-related factors.

Transitional Risk

Transitional risk refers to the indirect impacts of climate change on real estate assets. This includes financial risk like capital expenditures related to upgrading energy efficiency or decreased demand for properties in high-risk areas.

Both of these risks need to be assessed and analyzed at both the property level and the overall market.

📊 Charts and Data

The number of extreme storms and weather events are increasing at a rapid pace. In 2022, there were 18 climate events with over $1B in losses, with a total of $165B!

There is an estimated $200B overvaluation of the housing markets. The above chart shows the likely estimated damage in the next 30 years.

From wildfires on the west coast to hurricanes and flooding in the east, severe weather and climate disasters are increasing across the US.

While much of the climate data is not priced into the market, there is currently slight premium for houses in low risk areas. This trend will likely increase as more investors begin to consider climate risk and more reliable and transparent climate data is shared.

🔥 Opportunities

De-risk your properties and portfolio from climate related events

Use a company like ClimateCheck to check potential climate risks for existing properties or acquisition targets.
Take action on measures to de-risk, like designing climate-resilient buildings and underwriting for insurance and risk potential
Avoid potential "stranded assets" - buildings that are in high risk areas for severe climate or buildings that may not meet future energy standards.

Attract top tenants with premium properties in low-risk locations

Tenants have shown that they will pay a premium for sustainable buildings.
Properties in high-risk climate areas are subject to decreased demand and climate migration as people move away from extreme weather and high-risk climate.

Increase operating income and valuation

Low-risk climate areas currently rent and sell at a premium and this trend will continue as the market begins to more accurately price climate risk.
Understanding climate risk will allow investors to accurately price and manage insurance costs

Build for your environment

Resilient building will become increasingly important. This means designing and building for the environment.

Examples include:

Using durable materials to withstand harsh weather
Designing energy efficient buildings to utilize renewable resources
Implementing green roofs to manage stormwater runoff
Designing protective measures, such as seawalls or flood barriers

Build Companies to monitor and assess climate risk

There are many opportunities in the space for entrepreneurs to build hardware and software to support this industry. A major opportunity lies in "bridging the gap" between climate science and real estate knowledge.

Y combinator is on the lookout for climate tech start-ups.
Estimated $300B in dry powder for climate tech companies

🤝 Players

Now that we’ve identified the problem and opportunities, let’s look at some of the players in the space.

Venture Capital

Fifth Wall - VC firm and leader in the real estate space that launched a $500M climate tech fund

Greensoil Proptech Ventures - Impact investing to digitize and decarbonize the built environment

MetaProp - Early stage Prop Tech focused VC

Third Sphere - Investing in sustainable cities and communities

Developers

Hines - Leader in real estate sustainability, with strategies to turn assets from "brown to green"

Skanska - Committed to developing healthy and sustainable buildings

Terra Group - Miami, FL developer, a high-risk area, focused on sustainability

The Beach Company - Charleston, SC developer, a high-risk area, focused on sustainability.

Start-ups / Companies

ClimateCheck - Provides property level climate risk rating and score

Jupiter - Climate risk analytics software

GRESB - Providing global ESG data and benchmarks

Moody's - Provides ESG solutions and risk assessment

Designers

Architecture 2030 - organization promoting sustainable design

3XN Architects - leader in sustainable design

Arup - design and engineering focused on sustainability

Miller Hull - Sustainability focused designer

Builders

✨ Predictions

Climate models, used to assess potential damage and financial impact of natural disasters, will become more accurate, transparent, and more common practice in real estate analysis and underwriting
Growing regulatory pressure will force change in sustainability, likely at a cost to investors and developers that are unprepared
All major real estate investors and developers will have sustainability goals and will incorporate climate risk and analysis into their properties and portfolio
More frequent severe weather will force governments, developers, and investors to react and consider climate risk
There will be an increased demand and a premium placed on sustainable and resilient buildings in low-risk climates.
Real estate markets will begin to price climate risk with more transparent information and greater awareness

✅ Key Takeaways

Smart investors and developers are assessing climate risk in their underwriting and portfolios. These investments in favorable climates, built with resiliency and sustainability, will result in higher NOI and valuations.
In addition to the "green premium" for sustainable assets in favorable areas, assets that are are not built up to energy standards and located in high risk areas could become "stranded assets" and lose value.
Existing FEMA maps are out of date. Not understanding this may lead to unknowingly buying an asset in a high risk area that could lead to potential storm damage and greater insurance premiums in the future.
Anticipating climate change will allow investors to achieve outsized returns.