James Cook: From the recent wildfires in Southern California to the devastating floods last year in Valencia, Spain, it seems like extreme weather events are happening more often and causing more destruction. According to NOAA, the National Oceanic and Atmospheric Administration, in the US alone in 2024, there were 27 individual weather and climate disasters.
 

Jaime de Alamo: Which had a total estimated damage around 182 billion, which obviously has a massive impact on the way investors and banks are looking at the decisions that they're making, because this was a record year of both events and estimated damages.
 

James Cook: That is Jaime de Alamo. He is head of ESG value and risk for the Americas at JLL. On this episode of Trends and Insights, he joins Rich Sorkin, CEO and co-founder of Jupiter Intelligence to unpack the financial implications of climate risk for the commercial real estate sector. This is Trends and Insights: The Future of Commercial Real Estate. My name is James Cook, and I am a researcher for JLL. So Jaime, I'll start with you. When you talk with property owners, commercial real estate folks, how much is climate risk on their radar?
 

Jaime de Alamo: Our main client types are both investors and banks. Lenders and both of them are starting to ask more and more questions around climate risk and taking into consideration climate risk assessments into their decision making. What we're seeing from a divide between the banks and the investors on the bank side, we're seeing that they're taking into consideration the climate assessments more and more in their decisions. And what they're doing is either or a combination of the three, which is on one side, they're adding a premium to the cost of the loan because of that additional risk associated to properties that are under climate risk. And in simple terms, this makes the price of the loan more expensive. The second is the loan to value becomes smaller. And third, and this has been seen more in the capital coming from Europe, we're seeing how some banks are directly saying no to properties that are located in high-risk areas. And on the investor side, what we're seeing is that they're shifting towards making decisions based on climate resilience and they're pulling out of markets that are under high risk. And we're seeing this, for example, in the fires in L.A. We're seeing how there's a lot of properties that are suffering from these fires and investors are asking us personally a lot of questions around what's happening with our properties. Should we not invest there? What's going to be the value of these properties that are subject to these extreme weather events?
 

Rich Sorkin: I'm Rich Sorkin. I'm the co-founder and CEO of Jupiter Intelligence, and we're one of the leading companies helping large enterprises understand the impact of climate change on their physical assets, their financial assets, their supply chains, shareholder value, whole range of impacts like that. I would say we're seeing very similar things. From a context perspective, Jupiter has been at this for about eight years. And we work with over half of the systemically important banks in the United States. When we were raising capital in 2017, virtually no one in the private sector really was thinking about the question of what does climate change mean for me? What does it mean for my factories? What does it mean for my loan portfolio? What does it mean for my physical real estate assets? It wasn't really until about 2019 that first, the industrial sector, so oil and gas, petrochemicals, very big capital-intense assets started to think about this issue and the banking sector started to really focus on it in 2021. I think COVID actually was a bit of a wake-up call beyond what was just happening with climate change getting steadily worse. Because that was an era in which nearly everyone that was thinking about risk management was asking, "What other risks haven't we thought about?" By 2022, maybe you had the top 10 percent of companies in any given industry thinking about these issues. Today, I would say it's probably the top 30 or 40 percent of the largest companies in the world. And once you get beyond the largest companies in the world, it's still pretty early. And so I'm going back to what Jaime was saying about how the banks are behaving, the most sophisticated banks are already building the workflows to integrate this into their underwriting and decision-making models. The next tier is probably still a year to two years away. And then over half of the banks still have a ways to go. And that's going to be a big competitive advantage for the banks that are the furthest along.
 

James Cook: It seems to me that in order for you to accurately price in this risk, you've got to be able to forecast it. And, Rich, I guess this is a question for you. How far along are we with that? How accurate is your forecasting technology?
 

Rich Sorkin: Yeah, I would say our accuracy is as good or better than forecasting future interest rates, which is also a fundamental part of the loan equation. So everything's got uncertainty in it. And what you predict in five years is much better than what you might predict 50 years out, and there's obviously a range in between. The other thing that I would point out is that we're predicting on a statistical basis. So we're not predicting on July 31st, there's going to be a major flood event in Houston. We're predicting what's the probability of a certain level of flooding, or a certain level of hurricane damage, or a certain level of hail damage in a particular place in a given year.
 

James Cook: There's always been places in the world that have been relatively more risky, right? But it seems like that's changing quickly. And even less risky places are now getting riskier. What kinds of places are riskiest? And how is that changing?
 

Rich Sorkin: Yeah, I would say first of all, it's almost universally the case that the places that are the riskiest today are getting riskier, faster, so that's like the U.S. Southeast and the Gulf of Mexico for hurricanes, wind damage, flooding and the like, but it's also shifting up the Atlantic coast into places like New York and Boston. Similarly, heat stress in Europe is significantly increasing in southern Europe. And along with that, fire damage. It's already starting to impact tourism. There tends to be a shift in the expected paths of hurricanes and typhoons, which together are referred to as tropical cyclones, a shift away from the equator. So that's actually particularly a problem for Japan.
 

James Cook: Wow, that's scary. I guess these are things that I've heard in the news. There's nothing new here, but to hear it all summed up. Jaime, you're talking to clients, I imagine, around the world. What are they telling you about their perspectives on this risk?
 

Jaime de Alamo: Yeah, before I respond directly to that, I would add a little bit just as an anecdote. I'm from Spain, so I saw very closely the flooding that happened last year in Valencia, which is in a region that's traditionally known for these floodings. I think the last big one was in 1956, which is why they made a detour in the river and the actual city of Valencia was saved. But it's interesting to see how in eight hours it rained more than in a year. An official figure is over 220 people died, and there are thousands of people that lost their homes and such. So very sad and very unexpected caused by events that are not typically occurring in those areas much.

Back to your question. Yeah. In the context of 2022 with inflation and interest rates rising, it's true that the topic faded a little bit away, right? But at the same time, because of these spikes of inflation, we're seeing how replacement costs are skyrocketing. And if you're familiar with how insurance policies work, essentially premiums are a function of two things, right? The probability of loss, which is what Rich was talking about a second ago, and the loss severity, and the loss severity is essentially calculated through what is the replacement cost. And if the cost of materials are going up, and so is the labor cost, then that replacement cost goes up. And at the same time, you're having that probability of loss increasing through the number of catastrophic events that are occurring throughout the country and globally, then inevitably you have skyrocketing premiums in many high-risk areas. And investors are caring about, first of all, those premiums that are going up. Second of all, what's happening with areas where companies or insurance companies are walking away because, for example, now with the wildfires in LA we're going to run into an interesting issue. That is, I don't know if you're familiar with what's known as the insurance of last resort, which is the state insurance that covers those areas of those properties that cannot access insurance companies or private insurance companies, but the FAIR plan, which is the California state insurer of last resort. They have an availability of around 400 million dollars right now. That's what the estimates say. The estimates say that the uninsured amount is beyond 30 billion dollars. So what's going to happen in that case? And investors are asking themselves a question of if an area is not insurable, if a property is not insurable, then what can we do? Because the state isn't actually covering for that. And one of the things that we're actually hearing from investors that we're getting hired to do is, or one of the reasons why they're doing these climate assessments is because insurance companies are essentially getting a specific area with high risk and they're applying this blanket method to an area where there's high risk of flooding or high risk of hurricanes and applying a similar premium for insurance. Owners, landlords, they know that their property is more resilient than the properties in that specific location. So they need companies like us to help them determine what is the resiliency of their property and how can that reflect into the value of their property so they can go to the insurance companies and actually say, "Hey, you shouldn't apply these policies to us because our property has XYZ features that actually protect us more from the events or the extreme events that are becoming more common in this specific region."
 

Rich Sorkin: Yeah, this insurability or in the broader question of insurance issue is huge. And I think there's a number of additional dynamics as well. The first is, we like to refer to as duration mismatch. That the insurance policy generally is one year in coverage, and then you might see a repricing or a cancellation, depending on what's happening in the insurance company's own policy. And if you want to understand what the risk looks like over the life of the asset, you can't use your insurance price as a proxy for that. And in fact, you have to understand what's going to happen with your insurance costs from a real estate valuation perspective over the whole period or even beyond the whole period if the owner is looking at the price at the time of a transaction where the buyer is going to be looking at it. So understanding this future insurance cost and future premiums, along with all the other costs that are going up is very important. The other related aspect of this is the regulatory environment. The reason why California for fire and Florida for flooding and wind damage have essentially a state backstop is because the regulators haven't allowed the insurance companies to price for the true risk of the insurance. And so they're glossing over the fact that the insurance market doesn't work by creating these backstops that are actually not sufficient backstops in the case of disaster. You know, a firm like JLL is extremely well positioned to help their clients understand in California, this is a problem because the regulatory system is breaking down a well-functioning insurance segment. Whereas in another state, it might be less of an issue.
 

James Cook: I want to dig into that a little bit more. So if I understand that correctly, the government limits how much you can charge for insurance. Is that right? And for it to function, you've got to charge more for it. Is that fair to say?
 

Rich Sorkin: Yeah. Regulations vary in the United States on a state-by-state basis and globally on a national basis in most cases. So it's not one size fits all. So sometimes they limit the price, sometimes they limit the rate of the price increase or other aspects like that, the regulators essentially control what the pricing environment is going to be.
 

Jaime de Alamo: And there's a dynamic that if you look at one of the elements that Rich was mentioning, so there's some states that put a cap on how much you can increase your premium year over year, right? But if you're as an insurance company, because of the overall risk factors, you need to increase your pricing by, let's say, 20%, but you're just able to increase it by 10%, like it happens in Florida, for example, then what will happen is that year over year, the insurance company will keep on increasing those prices in order to try to get to that balance again.
 

Rich Sorkin: Yeah, this is a great point. And if you're the insured, the insurance company may not even be telling you that this is coming. It's just built into their strategy. Anticipating what's going to happen with insurance costs and insurability is definitely a very important aspect of this.
 

Jaime de Alamo: There's an additional item that doesn't fall directly in the cost, which is the coverage, right? Because another thing that occurs is the cost might not go up as much, but the coverage decreases, right? And what we're seeing is that, the deductible, which originally might be calculated as a fixed amount, is one, going up, or two, being calculated as a percentage of the asset value, meaning if you own a home of 500,000, for example, and you had a deductible of 2,000 to 3,000, now that's being switched to a deductible, perhaps of 2%, which goes up to 10,000, but at the same time, the property value goes up. So there's that deductible and therefore the coverage of the insurance is less. So it's an indirect or more indirect way of minimizing that risk without increasing further the premium.
 

Rich Sorkin: Yeah, that brings us to the broader topic of increased costs generally, right? So when most people think about climate change, they're thinking about what's the direct damage to the asset, right? So there's flooding. What's it going to cost me to repair? But there's also the downtime of the asset may not be usable for a period of time, or you might have to provide rebates to your tenants. If, again, if it's a real estate asset the other thing that impacts from a direct cost perspective is increased heating or cooling costs as well. And then the big one that's on the horizon is that the banks are not only thinking about the direct damage from to an asset or the impact to the collateral value, but they're also thinking about the borrower's ability to pay in an environment where all of these costs including the insurance costs are going up. And how does that get reflected in the interest rate? So it feeds on itself. You've got the direct operating cost, the damages, the insurance costs, the downtime and then soon enough the increased interest costs and maybe changes in the loan to value ratio that impact the overall collateral that's required as well.
 

Jaime de Alamo: And don't forget that James, that we're in an environment where interest rates have spiked and already debt service coverage ratios are becoming way tighter for those who don't know what that is essentially a metric that reflects the ability of a borrower to meet interest rates. The debt obligations through NOI and already with that DSCR getting tighter, if on top of that, you had a premium to insurance costs, that's going to become even more difficult for asset owners to face the payments and therefore it becomes even riskier for banks to have those loans in locations where climate risk actually has a pretty big or an increasing impact.
 

James Cook: We zoomed in a little bit on the U.S. there. What's the global perspective?
 

Rich Sorkin: There are two ways of thinking about this geographically. One is where the entity is based. So is it a European bank or a U.S. bank, but it's also where is their asset exposure? And there's more physical risk in the United States than there is in Europe just based on patterns, but generally speaking, the U.S. banks are more sophisticated about this than the European banks. They're a little further along in thinking about this and I would say there's more pressure from regulators in Europe to think about this from a disclosure perspective than there is in the United States. Whereas the actual risk management function in the United States tends to be, and also Canada for that matter, tends to be more mature on average than we're seeing in Europe. But Europe's catching up.
 

Jaime de Alamo: I will say though that there is a gap in regulations in the same way as there is a gap between traditional valuations and what's going on in the market right now, specifically in this topic. And this gap part of the gap is trying to be bridged by the IVS, the International Valuation Standards. Who released last year new guidelines on the international valuation standards, essentially is a body that regulates all kinds of valuations, not only real estate. And they released new guidelines last year stating that as of February 2025, all valuers or appraisers need to take into consideration ESG risks in their valuation processes, which includes climate risk. Now, IVS does not apply directly to the U.S. because the U.S. is regulated by USPAP.

But we're seeing how because Europe and APAC are now looking at this and trying to figure out what to do with this. We do know that, and to Rick's point, there are U.S. banks. Clients that we work with. I don't know if I'm allowed to mention names, but there are a couple large U.S. banks that are already starting to take these guidelines into consideration, even though they don't apply directly to the U.S., exactly because of what Rick said, because the fact that you're a U.S. bank It's not all right. You're a U.S. bank, but where are your assets of your loan book? Are they in Europe? Are they in APAC? Are they in Canada? Or similarly, a European bank that has presence in the U.S., they're going to want to apply the same standards to all their portfolio, right?

So those assets in the U.S. that are part of the loan book of a European bank, who's subject to the changes in the IVS, will need to do this as well to the U.S. assets. So this is a big change that kind of pushes that regulatory environment closer to the way traditional valuations have been done and because there's no market evidence that valuers can use today to price or limited market evidence that valuers can use to price in these factors. At least this is a starting point that kind of starts bridging that gap.
 

James Cook: We are, of course, interested in commercial real estate here, and there's an entire commercial real estate life cycle. So how does all of this impact that life cycle?
 

Rich Sorkin: We're talking about what's the time horizon for commercial real estate, which generally is you think about what the next transaction is going to be. How long is the hold period until that transaction? But at the point of the next transaction, the way investors are going to be thinking about climate risk is fundamentally different than the way they're thinking about it now. For example, seven years ago, no one was thinking about climate risk at all in terms of real estate valuations. Now they're thinking about it and how to integrate it into their process. But in another seven years, it's going to affect how the buyer thinks about all of those costs: the insurance costs, the lending costs, the operating costs, the damage impact. And that buyer in turn is going to be thinking about their next transaction. So time horizons for climate risk might actually be triple what the hold period is.
 

Jaime de Alamo: Yeah, that matches very well with the way we look at it at JLL as well, which is, what are the direct impacts on the value of the property and what are the indirect or intangible impacts on the value of the property? So I think all those intangibles are definitely going to have or are having an increasing impact on value that today is difficult to consider, but that definitely means that the risk of the property is increasing and therefore that's ultimately going to have an impact on the cap rate of the property.
 

James Cook: So I know our topic today is about uncertainty and risk, but I'm going to ask you to make a prediction about the future now. So apologies in advance. And maybe, Rich, I'll start with you. What can you say with some kind of certainty about the future of climate risk and the assessment of that risk and how it plays into valuation?
 

Rich Sorkin: Yeah, the first thing I would say is the risk is going to go up and it's going to go up faster than most people expect. There's virtually nothing on the horizon that indicates there's going to be any kind of global collaboration among the United States, China, India and the like for global action. And at the same time, competition for energy is just increasing rapidly. Secondly, the data quality already is good and good enough to support decision making in real estate and banking and insurance. The real challenge is the process flows to integrate that into automated decision making and decision making at scale beyond just transaction by transaction. That's still got a few years in front of it.
 

James Cook: Jaime, what do you think?
 

Jaime de Alamo: We're moving towards an environment, particularly in the U.S., where there's not as much of a disclosure reporting framework as there is in Europe. We're moving into an environment where financial implications are becoming more and more obvious, and I believe that the competitive nature of the U.S. as an economy will lead to finding solutions quicker and being able to materialize those financial implications in the next couple of years. We're going to have more evidence on how climate risk impacts property valuation and such, and companies are going to have more tools to be able to make better decisions. And as Rich said before, not everything's negative in all regions because if you balance your portfolio well, you're going to be able to get incredible returns. Or if you're able to own those resilient buildings in areas where there's high demand for those buildings, but at the same time, there's not a lot of them that meet those conditions, then you're probably going to make a lot of money.

James Cook: Excellent. Rich, Jaime, thank you so much for joining me today. This has been a fascinating conversation. I really appreciate your time.
 

Rich Sorkin: Thanks very much. It's a pleasure to join you.
 

Jaime de Alamo: Thank you very much. Thanks.
 

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