Why real estate businesses must come to terms with climate risk

For real estate businesses, understanding and addressing climate risk is key to protecting their bottom line. 

The real estate industry is no stranger to the elements. From early architectural work to day-to-day maintenance, property owners spend a great deal of time considering the capital, logistical and revenue-related impacts of weather. 

But despite generations of experience planning for warm summers and frigid winters, the real estate sector has yet to come to terms with a far more pressing environmental challenge: the long-term consequences of climate change. As consultancy firm McKinsey recently concluded, the issue of climate risk has been a “relatively peripheral concern for many real-estate players”.

Real estate companies can’t afford to ignore this issue any longer. As climate change accelerates, the physical risks posed by extreme weather events will continue to grow. Real estate owners that want to succeed must come to terms with their climate risk by identifying vulnerable properties, devising mitigation strategies, and creating plans to dispose of risky assets.

In 2021, worldwide losses from climate-related disasters reached $373 billion, 27% higher than the 21st century average. As the planet continues to warm, these disasters will become more frequent and severe. Droughts, rising sea levels, and increased precipitation will also increasingly affect communities and infrastructure across the world. 

Buildings are large, relatively illiquid assets which can’t simply be relocated to areas less susceptible to hazardous weather. In addition, properties are generally long-term investments, with assets held for years if not decades. These inflexibilities make real estate businesses (and their profit margins) particularly vulnerable to climate-related risks.

Climate risks have a range of direct and indirect consequences for the real estate industry. Physical damage to properties caused by weather events can reduce rental income, drive devaluations and limit resale opportunities. Rising insurance premiums and additional maintenance costs can increase operational costs, thinning profit margins. Expensive outlays like flood defenses and central air conditioning can limit returns on investments.

 Each of these eventualities can have a sizable impact on a real estate company’s bottom line, which is why businesses must turn their attention to climate resilience. You can learn more about this topic in our free ebook.

Real estate businesses that want to protect their bottom line from climate-related risks need to invest in making their portfolios resilient. In other words, they must adapt their portfolios for the realities of a changing climate. Focusing on reaching Net Zero is a solid start, and is essential to future stability. But it is not enough to stave off the impacts of decades of historic emissions.

To adapt with climate change, companies will need to gain a detailed, asset-level understanding of their exposure to climate risk. Only then will they be able to create strategies for shoring up their investments. 

For real estate companies, adapting to the changing climate is not solely about loss-reduction, it is also about identifying opportunities. For example, companies that incorporate climate risk into their investment approach will be able to more accurately price prospective properties. As the UN’s Environment Programme (UNEP) explained, “there is growing evidence across geographies that a climate-friendly and sustainable real estate sector can both preserve and increase asset value.”

Climate change presents a number of challenges and opportunities for real estate businesses. Property owners and investors that move quickly and decisively can capitalize on potential rewards while adapting their portfolios to extreme weather events and other climate-related risks. 

But commercial real estate businesses cannot take decisive action on climate risk unless they can discover, understand and share it with stakeholders. By incorporating Climate Intelligence into your decision making, your business can protect its bottom line from climate risk.

How do you make your real estate business climate intelligent? Find out in our free ebook.