Climate considerations have increasingly become a critical focus for real estate owners, operators, and investors over the past few decades, particularly as the frequency of billion-dollar weather and climate disasters has surged. Beyond the headline-grabbing events, more frequent temperature extremes and less stable energy costs have real financial implications for owners and residents. Key changes in our operating environment include:
- Heat waves: The number of heat waves has tripled since the 1960s, with episodes becoming longer and more intense.
- Heavy rainfall: Extreme single-day precipitation events have surged, with nine of the top 10 years for such events occurring since 1995.
- Drought: In late October 2024, all but two U.S. states were enduring at least moderate drought conditions.
- Hurricanes: Although the overall number of hurricanes has not significantly increased, their intensity and associated rainfall have risen.
- Wildfires: The frequency and severity of wildfires, particularly in the western United States, have intensified due to prolonged droughts and rising temperatures.
Challenges and opportunities
As weather patterns change, the climate-related risks to long-term capital appreciation have become more pronounced for real estate owners. For instance, a recent Wall Street Journal article highlighted a surge in home sale listings in Tampa, Florida, where residents are fleeing neighborhoods increasingly prone to flooding.
Furthermore, jurisdictions throughout the U.S. are implementing stringent climate policies, such as Building Energy Performance Standards (BEPS), which impose energy consumption–based financial penalties on building owners. These regulations are designed to encourage energy efficiency and reduce greenhouse gas emissions, but they also create financial risks for noncompliant property owners, necessitating a proactive approach to sustainability.
At Leo Impact Capital, a JBG SMITH subsidiary that focuses on long-term investments in multifamily housing, our mission is to maintain affordability, enhance economic mobility, and deliver solid financial returns. We achieve these goals by investing in well-located assets and ensuring efficient operations, with a focus on managing risks and controlling expenses.
Although we are not green investors and do not set explicit net zero or sustainability goals, in recent years it has become increasingly evident that we must apply a sustainability lens throughout the investment and asset management cycle to reduce risks and increase value in our portfolio. We’ve come to see the integration of sustainability and resilience into our operating approach as helping us to identify risks to be managed and opportunities to preserve and enhance the value of our investments.
Climate assessment and analysis
Our approach emphasizes the integration of climate risk assessments into our conventional investment and asset management decision-making processes, focusing on historical climate data, local infrastructure resilience, and regulatory frameworks.
The first step has been to better understand potential markets and investments from a climate perspective. We conduct thorough climate risk assessments that are incorporated into our market research. In addition to evaluating traditional factors such as employment, income, and connectivity, we analyze exposure to such climate risks as heat, cold, wind, and flooding. Understanding how cities and regions manage these risks is crucial, as climate events often affect broad areas. Among the factors we assess are:
- Historical climate data: Analyzing historical weather patterns helps us understand the likelihood of future climate events. Such data can inform our investment decisions and risk-management strategies.
- Local infrastructure: The resilience of local infrastructure, including drainage systems, utility networks, and emergency services, plays a critical role in a community’s ability to withstand climate events. Areas with robust infrastructure are generally more attractive for investment.
- Regulatory environment: Understanding local regulations related to climate change and energy efficiency is essential. Jurisdictions with stringent policies may pose additional risks for property owners, whereas those with supportive measures may present opportunities for investment.
There are several climate and real estate consulting services that provide detailed, state-by-state climate risk analysis; however, the National Risk Map, produced by the Federal Emergency Management Agency (FEMA), is a free online tool that provides information about key climate risk, down to the census tract level, and is searchable by address.
Looking beyond the market to the asset level, we evaluate sustainability and resilience as part of our physical due diligence. Among the factors we assess are:
- Physical risks: We assess the vulnerability of properties to climate-related events, such as flooding, wildfires, and extreme temperatures. This evaluation helps us identify potential mitigation strategies.
- Resilience measures: Understanding the resilience measures in place, such as flood defenses or fire-resistant materials, helps us to assess a property’s long-term viability.
- Energy efficiency: We conduct energy audits to identify opportunities for enhancing building efficiency and reducing operating costs. These audits provide a framework for potential sustainability investments, which we align with our capital plans.
The role of energy audits
Energy audits are a critical component of our approach to managing climate risks. These assessments help us identify areas where properties can improve energy efficiency, reduce utility costs, and minimize their environmental impact. Key elements of our energy audits include:
- Benchmarking energy use: We compare a property’s energy consumption to that of similar buildings to identify inefficiencies and areas for improvement.
- Identifying upgrades: The audit process allows us to pinpoint specific upgrades, such as HVAC systems, insulation, and lighting that can enhance energy efficiency.
- Cost-benefit analysis: We evaluate the financial implications of proposed upgrades, considering both upfront costs and long-term savings. This analysis helps us prioritize investments that offer the best return on investment.
Seizing opportunities in sustainability
The growing emphasis from state and local governments and utility companies on decarbonization and energy efficiency presents opportunities for multifamily housing investors. Many jurisdictions have created programs that offer no-cost and low-cost capital for improving building efficiency. By leveraging our energy audits, we can match asset needs with available funding, thus facilitating capital investments that benefit residents and investors. Several funding sources are available to support sustainability initiatives:
- Government grants and incentives: Many local, state, and federal programs offer grants and tax incentives for energy-efficient upgrades. These programs can significantly reduce the financial burden of implementing sustainability measures.
- Utility programs: Utilities often provide incentives for energy efficiency improvements, including rebates for upgrading appliances and systems. These programs can help offset the costs of energy audits and subsequent upgrades.
- Private financing: In addition to public funding, private financing options are increasingly available for sustainability projects. Green bonds and other financial instruments are designed to support environmentally friendly investments.
Although funding for climate-related investments is available, identifying and obtaining it can be challenging. A useful starting point is the Database of State Incentives for Renewables & Efficiency, a searchable online resource that identifies state-, local-, and utility-related funding programs.
We have seen firsthand the benefits of integrating climate analysis into our investment and asset management processes. Last year we acquired a 250-plus unit multifamily property and conducted a comprehensive energy audit during diligence that identified several potential sustainability investments.
By overlaying the results of our energy audit with an analysis of available funding, we were able to identify $1.8 million in grant funding to cover 80 percent of the cost associated with upgrading the HVAC system, replacing the domestic hot water system, installing energy-efficient lighting, and enhancing insulation. We’re implementing these projects now and expect not only to reduce annual energy cost for residents and ownership by nearly $100,000 but also to improve resident comfort and satisfaction and to reduce our repair and maintenance costs.
Across our portfolio, we have identified more than $13 million worth of sustainability investments that, when fully implemented, will reduce energy consumption by more than 60 percent and result in total annual savings of more than $500,000. Most important, we have identified roughly $10 million in grant funding to offset the costs of these investments. We expect funding for these types of investments to increase as cities and utilities seek to mitigate their climate-related risk.
At Leo Impact Capital, we recognize the strong business case for sustainability. Incorporating a climate lens into our work is a way not only to protect our assets but also to unlock new opportunities for growth and innovation. Incorporating a sustainability lens into our work has unlocked significant opportunities to reduce portfolio risks and create win-win outcomes that mitigate risks, enhance growth, generate cost savings, and make the properties more comfortable. Ultimately, these efforts benefit our residents and investors while improving the sustainability and resilience of our portfolio.
For more information about sustainability, resilience, and real estate, please contact ULI’s Randall Lewis Center for Sustainability in Real Estate.
