Climate Change May Trigger Significant Shifts in Real Estate Demand, Report Finds

Climate change may trigger a significant shift in real estate demand, says a new report from the Urban Land Institute and Heitman, a real estate investment management firm.

Real estate investors should continue to build their capacity to assess and manage migration-related and broader market-level investment risks and should actively understand the climate change adaptation needs of key markets, the report recommends.

“The real estate sector is reaching a crucial stage in the evolution of its approach to climate risk,” says ULI’s global CEO, Ed Walter. “We are coming to understand that leadership from the real estate investment industry is essential for society’s approaches to climate change to be effective, efficient, and equitable, versus deferring difficult decisions and displacing those who cannot afford to adapt.

He points out leading investors are turning down attractive short-term opportunities to focus on the long-term implications of the connections between migration, climate risk, and resilience.

Heitman CEO Maury Tognarelli warns investors must begin to prepare for the possibility of societal and economic disruption fueled by this dimension of climate risk.

“Just as we need to underwrite the impact of physical risks on property value, we need to anticipate the trajectory of climate migration and incorporate it into our investment analysis,” he adds.

The report calls upon investors to rethink conventional market-level research and ask whether an economy is strong enough to absorb and recover from a climate shock by looking first at the climate sensitivity of the dominant economic sectors within a market and then at the extent to which climate-sensitive sectors can manage risks.

The authors warn prioritizing infrastructure investment in areas where high-value property is concentrated, can exacerbate inequalities and can trigger migration by lower income residents as a default, requiring a careful approach to managing population change.

Other reports have signaled the growing risk climate change poses to real estate.

 In December, an analysis of commercial real estate flood risk suggested that 3.6 million commercial real estate properties face a growing chance of flood damage. The report from First Street Foundation and commercial engineering firm Arup suggested that US businesses will collectively lose 3.1 million days of operation due to flooding next year that is expected to cause “severe structural damage” as a result of climate change.

Additionally, of these, 729,999 retail, office, and multi-unit residential properties face annualized risk of more than $13.5 billion in 2022, growing to top $16.9 billion by 2052, about a 25% increase. The lost productivity impact on local economies would start at $49.9 billion this year and grow to $63.1 billion.

Increasingly, property databases and research providers are taking climate change into account. 

In November, as one example, ATTOM announced it will start incorporating climate change in its ratings at the property level for five hazards—wildfire, flood, heat, storm and drought. Moody’s REIS, as another example, also announced last year that it was making climate risk scores available on its analytics platform.