Value in a time of climate risk: How owners can adapt

Climate risks have a permeating effect on a real estate portfolio. Weather events impact the physical structure of a property and the appeal of a geographic market; energy efficiency has an impact on operational costs; and green ratings affect marketability and tenant demand. A climate risk analysis considers a broad spectrum of environmental data to assess the various ways that climate change and sustainable building practices can affect property performance. This includes taking into account the frequency of natural disasters, sea level rise, rising temperatures and air quality as well as potential impacts on infrastructure and livability.

Assessing climate risk shouldn’t be a one-time evaluation, but rather it should be an ongoing component of active portfolio management. Hodge says that monitoring the climate risk of an existing portfolio has become increasingly common as owners have a growing need to understand their current exposure. “Pre-purchase is important, but if you have a book of assets or if you are planning to sell, then you have a lot of interest in understanding the risk,” he says. JLL recently performed a risk assessment for a retail owner looking to sell. The assessment revealed that the property had significant flooding risk, and the owner was able to make property improvements before marketing the asset to preserve the investment return.

Regular risk assessments are particularly important because climate change, and the risks from it, are anything but static. Climate risks are constantly evolving and changing. Each natural disaster and severe weather event has a unique impact on a geographic market and changes the risk calculation. In some ways, major weather events illustrate how climate risk is a moving target. The number of extreme weather events in 2022 exceeded the 20-year average by 25, and that number is only expected to increase. As a result, investors failing to keep up with climate risk will almost certainly—and in some cases, severely—misjudge their true exposure.

In response, valuation and risk experts are also continuously improving the process of analysing climate risk to incorporate the most relevant and recent climate data. “The data has to evolve so that an investor can see the changes in risk over time and the impact on value,” explains Hodge. “We are analysing multiple sources of climate and property data to construct our own method and provide timely insights to investors.”

Due to the increasing frequency of natural disasters and extreme weather events, climate risk has become an essential metric in a real estate risk assessment and investment underwriting practices. In the face of unpredictable and uncontrollable climate change, owners that are closely monitoring these events and working with a team of advisors can properly measure risk exposure, protect investments and stabilise asset values.