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Factoring the effects of climate change into real estate investments

Residences leveled by the wildfire line in a neighborhood in Paradise, Calif., are seen in this November photo. Real estate risks are present in many places: along seacoasts; within watersheds; on hillsides; and in vulnerable urban, suburban and exurban areas.
Residences leveled by the wildfire line in a neighborhood in Paradise, Calif., are seen in this November photo. Real estate risks are present in many places: along seacoasts; within watersheds; on hillsides; and in vulnerable urban, suburban and exurban areas. (Noah Berger/Associated Press)

For real estate owners and developers, being underwater has long been metaphoric shorthand for stressful times, when property debt exceeds property value, or expenses exceed income. But the term now has new meaning: Real estate property could actually be underwater because of future climate change.

Hardly a day goes by without yet another report, editorial commentary or prediction about climate change and its risks, evidenced convincingly by countless scientific studies. Observable, measurable evidence includes increasing ocean and land temperatures; weather patterns and weather-related events of abnormal frequency and intensity such as hurricanes, flooding and wildfires; changing biosphere patterns; accelerating glacial melting at the poles and extreme northern and southern latitudes; and rising sea level.

But you don’t need to be a scientist to understand that economic and physical climate change effects could adversely affect real estate. Risks exist at all geographic scales and places: along seacoasts; within watersheds; on hillsides; and in vulnerable urban, suburban and exurban areas. Individual buildings likewise are at risk, depending on their location and construction.

Among recent reports worth reading is “Climate Risk and Real Estate Investment Decision-Making,” published by the Urban Land Institute (ULI) and Heitman, a real estate investment management firm. This is truly one report that President Trump — real estate developer, investor and owner — might actually want to read. Fundamentally about money, it identifies sources and impacts of “physical” risks and of “transition” risks associated with climate change.

Physical risks are those caused directly by specific catastrophic events — hurricanes, sea level rise, drought, wildfires — that are ultimately attributable to climate change and shifting weather patterns. Among the many negative impacts of such events are greatly increased cost of maintaining, repairing and reconstructing seriously damaged or destroyed structures; soaring costs of property insurance; and post-event business and economic productivity losses.

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Less obvious are transition risks over time not attributable to single catastrophic events. Progressive climate change could depress real estate market growth and viability, as well as property values. Public policies and regulations aimed at mitigating climate change effects could increase investment and ownership expenses, including taxes, insurance, code compliance, infrastructure and financing. Essential resources, such as energy and water, could become increasingly scarce and ever more costly.

The ULI-Heitman report pointedly cites insurance industry volatility stemming from uncertainty about an unknowable future and potentially skyrocketing premiums necessary to cover ever larger losses and claims. Viable and affordable insurance, a key to risk management, depends on being able to recognize and reasonably evaluate future risks.

As the report explains, the challenge is figuring out how to measure and mitigate future climate change risks affecting the sustainability and physical resilience of property, as well as property value, capital appreciation, revenue and liquidity. Real estate industry professionals are beginning to address this by analytically mapping specific physical risks associated with properties they own. Mapping incorporates historical and current, site-specific data with predictive geophysical, meteorological and economic modeling. Even earthquake risk may enter into calculations.

Meanwhile, LEED certified architects, engineers, real estate developers and government agencies have already taken steps to address and mitigate climate change impacts. They are using more environmentally sustainable materials, more renewable energy sources and less fossil fuels, thereby reducing greenhouse gas emissions that contribute to global climate change. Both the federal government and the District have adopted sustainability building codes and guidelines for site development and construction to create projects with zero carbon footprints and minimal adverse environmental impact.

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Additionally, in many American jurisdictions, including the Washington region, building within designated flood plains or wetlands is not permitted. This prudent policy protects those portions of the natural landscape that not only are subject to flooding, but also retain surface and subsurface water while helping to control flooding.

The ULI-Heitman report cites Florida’s Miami-Dade County to illustrate how a highly vulnerable region is attempting to mitigate multiple climate change risks and augment regional sustainability and resilience. The county is a partner in the Southeast Florida Climate Change Compact which has completed plans and committed funds to address greenhouse gas emissions, sea-level rise, storm-water management and flood control.

Remarkably, regional residents have proved willing to pay higher taxes. “Miami’s proactive and strategic investment helps mitigate the inherent physical risks it faces and makes a case for not red-lining regions at risk from climate change,” said Jim Murley, Miami-Dade County’s chief resilience officer. Savvy investors,” Murley added, “will look at both the physical risks and what cities are doing to mitigate risk for all of their real estate.”

A regional compact like the one in Florida would make sense for the Chesapeake Bay region encompassing low-lying, at-risk areas of Virginia, Maryland, Pennsylvania and Delaware.

In other words, you might want to hang on to your property in south Florida or the Eastern Shore.

The real estate decision-making bottom-line is clear. To stay afloat, we must act together and make public-private commitments, regionally and unselfishly, to implement and pay for climate change risk mitigation. Otherwise all of us will end up underwater physically and financially.

Roger K. Lewis is a retired practicing architect, a University of Maryland professor emeritus of architecture and a guest commentator on “The Kojo Nnamdi Show” on WAMU (88.5 FM).