How climate change creates a ‘new abnormal’ for the real estate market
A report from the San Francisco Federal Reserve underscores how climate shifts create big investment and economic risks
The publication page for the San Francisco Federal Reserve, part of the nation’s central banking system, isn’t known for light reading. Recent research papers, such as “Yield Curve Responses to Introducing Negative Policy Rates” or “Precautionary Pricing: The Disinflationary Effects of ELB Risk,” aren’t exactly meant to go viral.
But a new set of papers around climate change should gain an audience beyond academic and economic circles. Titled “Strategies to Address Climate Change Risk in Low- and Moderate-income Communities,” this collection of 18 articles by academics and experts collectively offers “one of the most specific and dire accountings of the dangers posed to businesses and communities in the United States,” according to the New York Times.
Other central banks and bankers are taking notice of climate change as well; Since 2017, 46 central banks and regulators have joined the Network for Greening the Financial System, according to the Financial Times, including representatives from China, France, and the United Kingdom. The World Economic Forum’s 2019 Global Risk Report listed three risks of climate change—extreme weather events, failure of climate change mitigation and adaptation, and natural disasters—as both the most immediate and most damaging.
These risks will also affect real estate investments and the operations of the real estate industry, which, despite increasingly grave reports about the impact of climate change on land use and sea levels, has not taken the policy steps and process reviews necessary to deal with the coming challenges.
“We’re at a tipping point with the financial community beginning to use this kind of climate risk data,” says Katie Walsh, who runs the cities program for CDP, a company that specializes in measuring climate change risks for corporations and cities. “There are already municipal bond investors making decisions on 50- or 100-year planning based on climate risk and climate management. It’s more concerning for an investor if cities and governments don’t understand the issues. If there’s no recognition, it’s concerning.”
Realigning real estate and banking for “the new abnormal”
Business leaders need “to take a leadership role in preparing vulnerable regions most at risk for a ‘new abnormal,’” according to the intro of the new Fed report. That includes mitigation strategies for sea-level rise, increased storm surges, and inland flooding, and, perhaps more importantly in a nation with a significant population of climate-science skeptics, a blunt and honest accounting of the potential financial loss that may accrue due to the devaluation of coastal real estate.
The United States is woefully underprepared. And without significant investment in better standards, systems, policies, and tools, every day the market functions is a day when significant amounts of money are being invested without a full understanding of the risks. In a recent report on climate change and real estate, the Urban Land Institute stated that “this process will be painful for investors who are caught off guard, but those who are prepared have the potential to outperform.”
According to a 2018 report by the Union of Concerned Scientists, “Underwater: Rising Seas, Chronic Floods, and the Implications for U.S. Coastal Real Estate,” an estimated 300,000 residential and commercial properties will likely face chronic and disruptive flooding by 2045, threatening $135 billion in property damage and forcing 280,000 Americans to adapt or relocate. This long-term analysis of how increased flooding will depress coastal real estate noted, alarmingly, that most investors in and developers of coastal real estate do not factor these risks into current value projections. Worldwide, according to the International Monetary Fund, significant assets, including property, could be “stranded” due to climate change, a reference to being both physically inaccessible and financially drained of value.