Rowes Wharf/Staff photo by James Sanna

Commercial property investors are finally starting to include climate change in their decisions, as insurers and regulators change how they evaluate risk, panelists said at an MIT Center for Real Estate forum Wednesday.

Lenders are beginning to take a parcel-by-parcel look at risks such as hurricanes and flooding, rather than relying upon ZIP code-wide data, when evaluating acquisitions, said Kevin Fagan, head of CRE economics analysis at Moody’s Analytics.

“Lenders are trying to identify what kind of climate risk they have on their books. You might be able to tell you have more likelihood of hurricanes in an area, but you don’t know what kind of risks are at the building level,” Fagan said.

Projected rising seas are becoming a paramount concern for waterfront property owners in downtown Boston. Dozens of Wharf District Council members have provided consultants with site-specific information as part of a study that will recommend a district-wide flood defense strategy in early 2023. 

Private insurers already are pulling out of some of the highest-risk areas in Florida and Louisiana, forcing property owners to go to state-subsidized insurers of last resort, Fagan said.

Private equity real estate fund managers, too, are starting to place significant weight on climate risks when evaluating acquisitions, said Sean Drygas, global lead of ESG and Impact at brokerage Colliers International.

“We’re going to see continual demand for better information that’s starting to get down to the individual building level and what is the elevation of the individual building,” Drygas said.

In October, the European Union announced that it will require all new buildings to be zero-emissions beginning in 2030, raising concerns that landlords will be unable to sign leases without meeting the new standards.

In Miami, commercial property owners don’t appear to have paid a heavy price so far from decreased rents at flood-prone buildings, according to a study by William Wheaton, a professor of real estate economics and urban studies at MIT.

Office tenants’ increased flexibility in the hybrid work era has blunted concerns so far, Wheaton said.

“Work-from-home makes the occasional flooding experience irrelevant to tenants,” Wheaton said. “If it happens every day at high tide, well that’s another question.”

However, prices of flood-prone properties are starting to fall, indicating that owners may have increased costs related to insurance, repairs and retrofits such as elevating critical building systems, Wheaton said.

CRE Investors Take Different Look at Climate Risk

by Steve Adams time to read: 2 min