There is no denying that the number of natural disasters and their severity have increased over the years. Wildfires have burned more than four million acres in California in 2020, which is double the previous record of two million acres that was set in 2018. On the other side of the country, the 2020 Atlantic hurricane season has also broken multiple records.
All these extreme weather events mean that buildings need to become more resilient to the changes that have happened and changes that will continue to occur. Whether one is managing a portfolio of assets worth billions or a single multifamily building, real estate resilience—the ability of a property or facility to adapt to and withstand extreme weathers and man-made disasters while maintaining its function and structure—is no longer just a nice-to-have but a necessity.
The financial case for real estate resilience is an easy one. Real estate managers who manage capital on behalf of institutional investors have a fiduciary responsibility to not only identify climate related risks that affect the assets they manage, but also to make material investments that can help mitigate those risks and increase the overall asset value.
More often now, potential investors are also asking about resiliency plans and management best practices, i.e. procedures for identifying, mitigating, and disclosing climate change and natural disaster risks.
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Some obvious risk factors, such as flood, hurricane, and fire, are already addressed by insurance policies. But what investors care about is maximizing rent by minimizing risks, and this is achieved by taking preventative measures.
For example, investing in resiliency projects such as reducing fire risk by cleaning detritus around buildings or relocating mission critical equipment away from flood-prone areas, will minimize property downtime due to expensive and long repairs during which the property may need to be vacated.
Addressing building resiliency is a multi-step approach.
The first step is to evaluate the potential climate change and natural disaster risks in the region and at the property site, such as fire and flooding, but also items like high winds, lightning, precipitation amount, and biodiversity habitat. Man-made risks like greenhouse gas emissions and air quality also need to be calculated.
After the risks have been identified, then it’s time to determine which mitigation measures to adopt based on cost and other business plan related factors. For an existing property, the building needs to be assessed based on its historical energy data, property condition and age, as well as the regional climate data in order to determine all the possible risks and mitigation measures. Factors also shift depending on the business plan, whether one is investing in multifamily, industrial or office space, and whether it’s a short- or long-term hold.
The final step is assessing whether you have adequate insurance coverage for risks that are too costly to mitigate.
With so many considerations, it can be overwhelming for investors to know where to start. This is why we’ve developed the Real Estate Resiliency Assessment as a screening tool that can be done within the due diligence process, and can be added on to a Property Condition Assessment.
In addition to natural disasters, 2020 became the year of Covid-19, a worldwide pandemic that no one could have foreseen. Fortunately, we can forecast climate changes and take control by mitigating potential building risks now.