The implications of climate change are becoming hard to ignore. The frequency of natural disasters has increased significantly in recent years, with the United States experiencing an average cost of $18 billion–plus from climate disasters per year. As these kinds of events have grown more common, calculating climate risk has become a hugely important task for commercial property owners.
The topic was the main theme during a panel discussion at the April 2024 Resilience Summit in New York City. Panelists from Tishman Speyer, LaSalle Investment Management, RCLCO, and Evora Global delved the challenges that real estate professionals are facing right now with understanding climate risk analytics and how best to use the data in making decisions around their real estate assets.
At the moment, the commercial real estate industry is still grappling with the best ways to incorporate climate risk data into its various business strategies. “It’s kind of like an experiment. A lot of the industry is still figuring this out, and there’s a lot of learning to do.” said Spenser Robinson, the entrepreneurship chairperson and director of real estate at Central Michigan University and moderator of the panel “Integrating Climate Risk Data into Real Estate Investment Decision-Making.” No established industry norm exists yet for how companies are weighing climate risks, and firms are using different maps and various worst-case scenarios of global temperature rise.
At LaSalle Investment Management—a company that works globally in office, retail, residential, and industrial asset classes—every asset is evaluated before it goes to the investment committee, said Julie Manning, global head of climate and carbon for the firm. She said she tells professionals that no matter what kind of assessment metric is being applied, the data is not precise, but that as long as a good data provider is used, it should be pointing companies in the right direction.
“It usually gives you an idea of where to look deeper,” Manning said. “We are using data almost as a flagging system.” For instance, if a secondary source supports LaSalle’s own estimation that a risk is high, Manning encourages her teams to investigate further. “We need a human element [in] the evaluation of that data,” she said. “The [overall] data is a great starting point but won’t give you all the answers you need in [the] underwriting data.”
At New York–based Tishman Speyer, a real estate investment and development firm, company leaders measure climate risk a little differently on its value-add properties than they do on its core properties, and they try to take data beyond the basics, said Jonathan Flaherty, managing director, global head of sustainability and building technologies at Tishman Speyer. “As you talk to portfolio managers and asset managers, it’s easy to get lost in alphabet soup [amid] the complexity of sustainability,” Flaherty said. “How do you translate the science of sustainability into something relevant and actionable to managers and the investment community?”
Investors are undertaking their own studies and reports, and as they seek to understand the risk landscape, they recognize how much of a fact-finding mission they face these days in determining the ways that company leaders are thinking about climate risk and assessing that risk, said Cyndi Thomas, managing director at the consulting firm RCLCO Fund Advisors. “One important factor is [that] they want to know who is having that conversation, who is a part of [it],” Thomas said. “It’s not just sustainability leaders at organizations; they want to know everyone working on it. I think there’s a real air of collaboration and info sharing going on today.”
Yetsuh Frank is executive vice president at Evora Global, an environmental consulting firm that works with real estate companies on their ESG data by using proprietary data management software. His company works mainly at the fund level and screens a portfolio by using the physical risk tools as selected by the client. The firm then examines each asset that is flagged and investigates both the issues with the asset and how the issues could be mitigated. In some cases, the firm helps clients integrate physical risk into investment committee memos. Frank has found that real estate companies have a lot more learning to do in this space, and that it’s more than just checking a box. “It’s really important to always be learning and educating people,” Frank said.
Looking ahead, the market disruption that climate change is causing, and will continue to cause in the real estate industry, is something that creates not only risk but also potential opportunities. Although there may be certain submarkets that investors will migrate away from, there are others that could benefit over the long term, Thomas said. “I just think it’s something we can’t ignore,” she said. With the advances being made in technology and analytics to capture climate risk on a granular level, future opportunities could look different, even on a block-to-block basis—something Frank called “sub-submarkets.” “We’re having to get really detailed when looking at those things,” he said.
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