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The U.S. suffered $18 billion worth of damage in weather and climate disasters in 2021, according to the National Oceanic and Atmospheric Administration. And as Floridians emerge from Hurricane Ian, which made landfall Wednesday as a Category 4 storm, experts predict that such costly events will increase in both frequency and severity. For real estate investors and developers trying to gauge and manage risk related to climate change, there is a wide variety of climate-analytics data, software, and consulting services available. But the sheer volume of information can be overwhelming. At an Urban Land Institute event Friday, experts weighed in on ULI’s new report, “How to Choose, Use, and Better Understand Climate-Risk Analytics.” They offered advice on how to find the right data product for your business and how to begin incorporating climate-risk information into decision-making.
One of the top uses of climate-risk analytics is to evaluate physical risk—that is, the risk to real estate that comes from climatic events, such as wildfires, storms and floods. One of the challenges with current climate-risk tools, said Elena Alschuler, head of Americas sustainability at LaSalle Investment Management (a co-sponsor of the report), is their inconsistency. Vendors surveyed for the report offered widely varied scores for the exact same properties. Because of this, it’s important to approach even the highest risk ratings with some caution when weighing the purchase of an investment property. “We have one main provider that flags [properties] with a low, medium or high indicator of risk,” said Alschuler. “Whenever there is a red flag, we take a second look. We don’t necessarily take their assessment as the final word.”
Climate-risk analytics is also becoming a valuable tool when selling investment properties. Increasingly, companies are starting to factor climate risk into their pricing, said JP Flaherty, managing director and global head of sustainability and building technologies at Tishman Speyer—though once again, he counsels caution. “It’s all about the timing,” said Flaherty. “If the tools say there will be a disaster 48 years from now, it’s not being priced in. If it’s within the realm of an insurance carrier’s interest, then, yes, it will be priced in.”
And while the idea of risk resulting from climate change might be a little unsettling for some real estate professionals, Flaherty believes that it’s just another factor that needs to be priced into a deal. “It’s our job as fiduciaries to understand these risks,” said Flaherty. “We have to try to mitigate the risk and speak to these issues confidently.”
So where to start for those new to climate-risk analytics? Anne Peck, vice president and head of environmental, social, governance and resiliency at TA Realty, understands the hesitation of real estate professionals on this issue—her company is in the early stages of incorporating climate-risk analytics. Her advice for those still unsure: Just get started. “Knowing that there are more than 60 groups out there to provide this information can be intimidating,” said Peck. “Don’t get overwhelmed. Just start looking at your options.”
The ULI report provides a list of questions real estate professionals can ask data providers. Top questions include:
- Does the provider’s report meet my strategic objectives?
- Does it satisfy my investment process and business decision-making needs?
- Does it satisfy my regulatory reporting requirements?
- Does it satisfy my voluntary reporting requirements?
- Are all hazards I want to evaluate covered?
Above all, said Flaherty, it’s important to understand that climate-risk analytics is just another tool. “Just because it looks now that Miami will be underwater in 80 years doesn’t mean that will happen,” he said. “The modeling doesn’t take into account what humans will do. It’s a tool for decision-making, not the basis for which to make decisions.”