It’s common knowledge that climate risks may pose physical risk to assets and portfolios. REITs are now including sustainability and climate risk resilience reporting in annual environmental, social and governance (ESG) reports, and some lenders are reviewing collateral and portfolios from a climate risk perspective. It was also recently announced that Moody’s presale reports now include physical climate risk tables for the properties backing the loans in CMBS and CRE CLO transactions. But how do these trends translate to property value and what can you do about it?

Disruptions to insurance availability will likely create changes in property values in many parts of the US. In a 2019 study, Deloitte found that more than half of US state insurance regulators “indicated that climate change was likely to have a high impact or extremely high impact on coverage availability and underwriting assumptions.” A 2020 report issued by ULI indicated investors are already seeing increases in property insurance premiums. Some investors “envisioned a future in which properties could not qualify for insurance at all and therefore became ineligible for loans.”

Investors and lenders alike should be concerned about exit risk and the ability to obtain insurance coverage at a reasonable cost. Based on this, considerations for investors and lenders may include:

  • Investors (and their lenders) should consider if they’re paying too much for a property given its long-term risk of physical damage and/or higher insurance rates. Investors should realize that FEMA maps are not as accurate as many more advanced climate models in projecting flood risk.
  • Investors may wish to proactively and strategically exit high risk properties now as climate risk modeling becomes more common in due diligence and insurance underwriting
  • Similarly, lenders may wish to prioritize certain types of properties in lower-risk areas to balance their loan portfolios from a climate risk perspective

Beyond the exit risk side of the equation, costs to operate assets could also increase as a result of:

  • Rising operational costs such as energy use for HVAC equipment
  • Greater capex for backup generators, water pumping systems, reinforcement of building exteriors
  • Increased delinquencies after extreme events

Where there is risk, there is also opportunity. Climate change risk also presents opportunities such as:

  • Strategic investment in regions likely to benefit according to the models
  • Improved competitive position of climate-resilient and energy-efficient assets over time

While the decisions made by investors and lenders will vary depending on the situation, it may be helpful to understand the types of services available to augment your decision-making process.

Physical Risk & Adaptation Consulting as part of Due Diligence & Capital Planning:

At AEI, we offer the following solutions:

  • Phase I Environmental Site Assessment (ESA) with Climate Risk Review for basic due diligence purposes (similar to referencing flood or radon zone in traditional ESAs)
  • Property Condition Assessment (PCA) with Climate Risk Review for due diligence and cost estimating relative to projected operational cost increases or other needed adaptations.
  • Facility Condition Assessment with Physical Risk Review – cost estimating relative to projected operational cost increases or other needed adaptations including priorities and capital planning tables for future budgeting.
  • Physical Risk Assessment summarizing site-specific climate risk modeling data accompanied by a site inspection of the property to assess property and building characteristics relative to the risk. Specialized offerings include:
    • Physical Risk Assessment for Industrial Sites with Hazardous Materials or Petroleum Product Storage
    • Physical Risk Assessment for Active Remediation Systems (ASTM WK66522 Guide for Remedial Action Resiliency to Climate Impacts)  
  • Portfolio Physical Climate Risk Vulnerability Assessment – Portfolio-wide review of climate risk data, with a determination of high-risk, moderate-risk, and low risk, accompanied by recommendations for further review, as discussed below
  • Adaptation Consulting: A review of physical risk and recommendations for adaptation actions, such as building modifications and relocation of MEP components based on the anticipated flood level and/or hardening of the building envelope to minimize water intrusion. Evaluating back-up energy sources in the event of power supply disruption, property modifications to reduce fire risk, etc. For new construction, changes to building elevation can be incorporated into planning.

Beyond physical risk, many clients are now incorporating general sustainability into their Property Condition Assessment (PCA) Scope of Work. For instance, we may include the following within a PCA:

  • Review available commissioning or energy audit reports
  • Compliance with local audit or commissioning requirements
  • Verification of Sustainability certification and certification potential
  • Water consumption and cost attributes, including annual water consumption
  • Electrical/ Gas Consumption and Cost Attributes, including annual electrical consumption
  • HVAC and water heater equipment descriptions, age, RUL, fuel source, etc.
  • Types of lighting and window descriptions, age, RUL, etc.
  • Building Performance Audits
  • Roof (Solar opportunities)
  • Solar systems

For more information on climate risk and sustainability assessments, contact AEI today.

Holly Neber
p. 925.746.6017
c. 925.876.6083