The earth’s climate is changing, and it’s impacting industries worldwide from trade to farming. The real estate industry has historically been somewhat hesitant to react to these changes, but there are signs that the market is finally waking up. In this article, we take a look at the trends in climate risk and opportunities for property and real estate in 2022.
Impact of climate change on real estate
Previously only a minor issue for many real estate players, climate change is now rapidly moving to the top of the list. Investors around the globe have recently made net-zero pledges, regulators created reporting guidelines, governments implemented laws limiting emissions, workers pushed for action, and tenants requested more environmentally friendly structures. Communities are increasingly at risk from storms, fires, excessive heat, and other hazards, which accelerates the physical effects of a changing climate. The effects of climate change are already being seen in our everyday lives, from rising sea levels to the increased frequency of hurricanes and floods.
In the years leading up to 2050, when the world will experience both the physical effects of climate change and the economic, social, and regulatory changes required to decarbonize, these changes have given real estate leaders a sense of urgency regarding their crucial role in the climate transition. Real estate players now have new obligations to revalue and future-proof their portfolios due to the changing climate, but they also have new opportunity to generate new sources of value.
The following are some possible outcomes of failing to take action:
- impaired civil, residential and commercial infrastructure
- higher insurance premiums due to increased risk exposure
- loss of value due to flood vulnerability or extreme weather events
- increased maintenance costs due to extreme weather events
- damaged reputation and loss of tenants from the community
Opportunities for real estate companies in climate change
Real estate management covers all aspects of real estates, such as leasing and ownership. Real estate managers need to understand the market and the properties they manage, but they also need to be familiar with relevant laws, regulations, and policies.
When it comes to climate change adaptation and mitigation in real estate markets, opportunities abound for real estate companies that offer effective services that address climate-related risks. For example, some companies have found success by providing clients with information on how their operations can adapt to changing weather patterns; another provides energy efficiency audits for commercial buildings; yet another offers an online toolkit for developers who want help navigating the process of building in floodplains or other areas affected by sea level rise.
Fundamental shifts brought on by the climate transition will give real estate players new avenues for competitive differentiation and value development. More importantly, leaders will significantly improve the world’s capacity to address the climate crisis. And as the climate continues to change, real estate companies will need to adapt as well.
Climate risk opportunities in real estate management in 2022
Recent climate stress tests on the portfolios of several large real estate businesses revealed a considerable impact on portfolio value, with potential losses for some loan portfolios doubling over the coming years. They discovered notable diversity within the portfolios, which is noteworthy. Some properties would gain from changes brought about by the climate transition due to their carbon footprint, location, or tenant makeup, while others would see major value declines. Players must decide which assets will be impacted, how they will be impacted, and how to react.
As climate change progresses, the world will face an increasing number of risks to real estate assets. From buildings and infrastructure to goods, services, and livelihoods, this risk will build over time as climate impacts worsen. However, some opportunities can be taken advantage of now to avoid or reduce these risks.
- Opportunity 1: Emergence of next-generation building efficiency and renewables microgrids, real estate performance targets, and concept of net positive buildings
- Opportunity 2: Increased focus on real estate resilience and emergency response planning
- Opportunity 3: Global real estate investor initiatives aligning risk assessment, incentives, training, and business strategies with climate change mitigation and adaptation goals
Opportunity 1: Emergence of next-generation building efficiency and the concept of net positive buildings
Next-generation building efficiency and renewable microgrids: As the global market for environmental technologies continues to grow, real estate professionals will be able to select from a wide variety of solutions that help reduce energy use in buildings. In addition to new green technologies such as LED lighting, energy-efficient heating systems, solar panels, and smart windows—all of which have become standard features in modern skyscrapers—next-generation solutions will include advanced battery storage technology and electrochemical water treatment systems.
Real estate performance targets: To meet the rising demand for greener buildings, many cities are implementing policies encouraging their construction. These include mandatory requirements for LEED certification (Leadership in Energy & Environmental Design), Net Zero Energy Buildings, or Net Positive Energy Buildings (e.g., those that produce more renewable energy than they consume). In some cases these regulations may also apply retroactively to existing properties; others allow owners who invest considerable capital in retrofitting or replacing traditional fixtures with efficient alternatives—such as LED lighting or heat pumps—to receive credit for meeting these requirements.
Concept of net positive buildings: Achieving net positive status means generating enough onsite renewable power over time (usually within five years) so that consumption at any given point equals zero or less than consumption from grid electricity—even when accounting for periods when no sun shines on solar panels or the wind blows through turbines during calm weather conditions! Such real estate projects could enable landlords with large portfolios across different geographic regions around the world where climate change impacts vary significantly depending upon location specifics such as proximity/distance from coastlines along with prevailing winds directionality patterns etc.
Opportunity 2: Increased focus on resilience and emergency response planning
Real estate managers and tenants will increasingly focus on resilience, including emergency response planning. A resilient building can withstand hazards such as flooding, earthquakes, fires, and extreme weather events. To make a building more resilient, you need to ensure it has:
- Strong foundations and structural integrity
- Emergency power sources are available at all times (a generator or a backup battery system)
- Watertight doors and windows to prevent water damage in the event of a flood
This can also be achieved by configuring your real estate management software so that you have access to robust datasets regarding the current state of your buildings’ physical assets such as walls/floors/ceilings as well as their electrical systems (lighting/air conditioning). The data will allow you to see what needs repairing before disaster strikes; if there’s any damage after an emergency occurs then this can also help expedite repairs once the situation is under control again – i.e., no homeowner lawsuits due to negligence on behalf of those with responsibility for upkeep.
Real estate management software platforms like PlanRadar allows managers to access all building-related data including sensor information in one place allowing them to identify inefficiencies and spot opportunities for carbon emission reduction. To learn more about how PlanRadar enables you to plan and adapt for climate change, you can book a demo or contact us here.
Opportunity 3: Global investor initiatives with climate change mitigation and adaptation goals
As an investor, you may be looking at the future of climate change through one of two lenses: either a risk or an opportunity.
If you’re approaching it as a risk, there are some things to consider. The first step is understanding what your exposure is going to be by identifying your real estate portfolio emissions and then assessing potential impacts based on these emissions. Then, using that information, create a strategy for how you can manage those risks throughout the lifecycle of your property investments.
The second step is figuring out if there are any opportunities in this market—and if so, what those might be for real estate investors who can leverage them to make money, by investing in climate solution,s instead of simply having their portfolios suffer the consequences (or costs) associated with inaction about global warming’s effects on our planet’s ecosystems.
Conclusion
In summary, we believe that real estate is one of the most at-risk industries for climate change. However, it also has a lot of potential to be a leader in reducing the impact of climate change by creating sustainable buildings and communities. The real estate sector will see seismic shifts as a result of the impending climate change landscape, which will affect real estate investor and tenant expectations, the value of individual assets, and the fundamental strategies for building and managing properties. By recognising the implications for asset values, looking for ways to decarbonize, and creating opportunity by aiding the shift, shrewd players will get ahead of these developments and build climate intelligence early.
Through these significant physical and economic transformations, real estate will continue to redefine how people live and work.
Looking to get started with property management software that enables you to identify opportunities and adapt to climate change? Start your 30-day free PlanRadar trial here.
