A 2018 study by Four Twenty Seven, in association with GeoPhy, a real estate technology company, assessed 73,500 properties owned by 321 REITs. It found that 35 percent of REIT-owned properties, globally, are exposed to three primary climate risks:
1. Extreme rainfall and inland floods (17 percent) – With 204,000 damaged homes and $125 billion in repair costs, Hurricane Harvey in Houston, Texas, was a reminder of the devastating impacts of inland flooding. American Homes 4 Rent, a REIT included in Four Twenty Seven’s 2018 study, incurred $20 million in hurricane-related expenses, with only $11 million covered by insurance.
2. Cyclones, hurricanes and typhoons (12 percent) – The 2018 hurricane season generated 15 named storms, including eight hurricanes. Two of those – Hurricane Michael in the Florida Panhandle and Hurricane Florence in the Carolinas – reached Category 3 or above. While still recovering from the effects of Hurricane Harvey, American Homes 4 Rent was hit again by Hurricane Florence. The company owns 9,767 homes across the Carolinas, which represents nearly 20 percent of their total property count.
3. Sea level rise and coastal floods (6 percent) – Many high-value U.S. REITs (with assets in excess of $22.4 billion) have properties exposed to rising sea levels, some of which are located in the following coastal markets:
- New York Metro Area
- San Francisco Bay Area
- Fort Lauderdale
Data derived by NASA scientists indicates that sea levels rise .13 inches (3.2 mm) every year, possibly putting high-value REIT-owned properties at risk of coastal flooding in the distant future.
Physical and Transactional Impacts
Climate risk assessment tools and technologies are becoming readily available to assist investors with understanding the nature of climate risks and the effect it has on real estate. By combining advanced mapping capabilities with real estate risk analysis, rating agencies are able to provide investors a wide range of information about extreme weather events and long-term climate impacts.
Impacts imposed by climate risks are often divided into two categories:
1. Physical Impacts are the most observable of the two and are derived from the direct damage to buildings after an extreme weather event, such as excessive rainfall or rising sea levels. Physical impacts from climate risks include:
- Costs to repair or replace damaged or destroyed buildings
- Property downtime and business disruption
- Potential increase in insurance premiums or reduced/no insurance availability
2. Transitional Impacts focus on economic and societal responses to climate risks that are expected to occur over time. Examples of transitional impacts include:
- Reduction in market activity – decreased property values and/or business relocation
- Implementation of government regulations to address climate change
- Reduction of available resources, such as energy and water
Both physical and transitional impacts can present a financial burden upon REITs. Climate assessment tools and technologies provide investors the opportunity to actively assess both current and future climate risks, which could potentially lower or eliminate the financial burdens attributable to climate impacts.
Adaptation and Mitigation
Undoubtedly, the phrase “Location, Location, Location” has taken on an entirely different meaning in the investment world, as many key investment markets are greatly exposed to climate risks. With a better understanding of the physical and transitional impacts that climate risks can have on real estate, REIT managers, advisors and investors can begin to investigate ways to implement climate adaptation and mitigation protocols that best fit their investment portfolios and interests.