Real estate investors need to factor in the human side of climate change and take a long-term view of their investments.
In August 2005, as Hurricane Katrina approached New Orleans, a million residents fled. After the levees broke, about 1,000 people died. A month after the hurricane, 600,000 people across the region were still displaced when Hurricane Rita hit, which was responsible for 120 deaths. A year after Katrina, the population of New Orleans was still half its previous size.
This is one of the largest internal displacements the United States has ever seen. It is also a cautionary tale about climate migration. Emergency management organizations had warned for years of the city’s vulnerability to a major hurricane, but New Orleans was unprepared.
As climate events become more severe because of rising global temperatures, it is imperative that municipalities create resilience plans that are also socially equitable. Investors need to be more aware of climate risk and migration, and take a longer-term view of their portfolios. Partnering with private capital is necessary to adapt the built environment expediently to withstand adverse climate events and adapt to climate migration challenges.
“The asset-centric approach that dominates the climate risk strategy of most investors isn’t quite sufficient. You can have a truly climate-proof building, but if the roads are underwater 20 times a year, the building is going to lose value,” says Zac Taylor, a researcher in the faculty of architecture and the built environment at Delft University of Technology in the Netherlands.
ULI’s new report with Heitman, Climate Migration and Real Estate Investment Decision-Making, asked industry experts how they are unpacking climate migration and climate risk strategy to distill insights into this complex issue. The report offers a two-step framework for making investments.
Climate change “is a factor in location decisions people are already making today, buried in there in a thorny, sometimes counterintuitive way. We need to think about how we might find these climate signals and understand the factors that make people move or stay,” says Taylor, lead author of the report.
It comes down to what draws people to a place, such as the quality of life, the housing stock, good jobs, and feeling safe, and whether the location is preparing for climate change risks. And investors are trying to predict when populations might be pushed from a place hard hit by climate events.
“We’re at the very beginning of the most significant mass migration in human history,” says Brian Swett, cities leader for the Americas at Arup. Climate migration is not a future issue; it is already happening.
“There’s a huge lag, historically, between demographic mobility and shifts in demand and the real estate industry’s capacity to provide supply,” says Jesse Keenan, associate professor of real estate at the school of architecture at Tulane University in New Orleans. “Other than trying to track supply and demand, you have to think about affordability and environmental sustainability in the receiving zones. I don’t think we’ve got a strong handle on the obligations and opportunities.”
Climate Migration
Assessing the climate risk of cities and individual assets is challenging in itself. Measuring climate migration is even more so.
“Even the weather forecast for next week can be very different. Predicting climate over the next 50 years? That’s difficult,” says Maarten Jennen, senior director within the private real estate team of PGGM, a major pension fund in the Netherlands. “And then trying to predict how people or companies might react to these changes and move? Then it becomes even more difficult.”
Climate migration can include moving to another country, within a country, or within a municipality. Those decisions are driven by adverse climate changes including flooding, droughts, wildfires, storms, and extreme temperatures, but also many other factors.
“People move for a lot of reasons—because of jobs, family ties, friends, or they just like the place. Climate issues are just one part—a little one or a big one,” says A.R. Siders of the University of Delaware’s Disaster Research Center. “Everyone has climate preferences; I’d rather live in Maine than Florida. And we all have different levels of risk that we’re comfortable with. Some people are comfortable with kayaking to the grocery store when the road floods. Others are not.”
Some segments of the property markets could decline in value as residents and businesses relocate from places unable to manage their climate risk. New real estate investment opportunities will emerge in neighborhoods and regions more able to adapt to climate change and absorb shocks.
Heitman has been observing where people have moved during the pandemic. In 2020, many people left New York City and California, both of which face serious climate risks. But many people moved to Florida and the Carolinas, which are not without risk.
“Climate risk might not have been top-of-mind for people. It was more about the cost of living and the quality of life,” says Laura Craft, Heitman’s head of global environmental, social, and governance (ESG) strategy. But if insurance premiums rise with the sea levels, “it could get to a point where there’s no more cost-of-living advantage, or the quality of life is impaired.”
It is difficult to determine the number of climate migrants globally, since people often have multiple factors driving their decisions to leave a place. The U.N. High Commissioner for Refugees estimates that 95 percent of conflict displacements in 2020 occurred in countries also vulnerable to climate change.
Last year, the World Bank estimated that climate change could cause 216 million people around the world to relocate within their own country over the next 30 years.
Every place in the world has some level of climate risk, Siders points out. Some have a slow onset, while large climate events can spur a sudden migration. The United States experienced 20 separate climate disasters causing at least $1 billion in damages in 2021, just shy of the record of 22 set in 2020.
“Areas at risk without the mitigation measures in place can be severely damaged by an event,” Craft says. “Those locations may not have the economic strength, or the stability provided by having a large number of Fortune 500 companies, or other headquarters to rebuild and bring people back to the area after the event.” And, of course, the people most at risk are also often the least able to relocate.
“How we currently invest in climate protection infrastructure unfortunately often defaults to the asset value,” Swett says. “It just makes people look at protecting a downtown commercial core rather than public housing in other places.”The average home price in New Orleans rose 46 percent between 2005 and 2015. The city demolished a number of public housing developments, leaving the city with 3,200 fewer public housing units than before Hurricane Katrina.
Although the population of New Orleans has returned to pre-Katrina levels, the demographics have changed: Blacks represented 75 percent of the city’s residents in 2000, but whites represented 71 percent of the population in 2019. Some say this is a prime example of climate gentrification.
Keenan has been tracking the phenomenon of climate gentrification, which he describes as capital’s shifting zone of preferences. This can manifest in the three following ways:• In the superior investment pathway, capital shifts from high-risk areas to lower-risk areas.• In the cost burden pathway, increased insurance costs and taxes drive lower earners out and only the wealthy can remain in the area.• And in the resilience investment pathway, making engineering improvements increases housing demand and thus prices and drives out the people the changes were intended to protect.
“Anywhere that you have climate risk being capitalized into the market, you’ll see a shakedown of the geography of risk, and capital will follow,” Keenan says. He has long predicted that northern cities such as Duluth, Minnesota, and Buffalo, New York, will become climate havens.
Taylor points to the example of Miami Beach, a high-risk community with high-value real estate and high-income residents.
“They’re already spending millions to keep the roads dry. But where do the people who work in Miami Beach live?” he asks. Less wealthy parts of Miami cannot fund climate mitigation efforts at the same scale using the same financial tools. “Community-level climate vulnerability and resilience are fundamental to understanding the potential for migration within or between markets.”
Managed Retreat and Building Barriers
Moving people out of harm’s way has long been a component of climate migration, Siders explains. Managed retreat is a strategy that some communities pursue to move individual homes, critical infrastructure, or entire settlements to areas less at risk.
In Indonesia, the capital city of Jakarta recently ranked first on a list of climate-threatened global cities. Rising sea levels and flooding, in tandem with earthquakes and tsunamis, are an ongoing threat to its 10 million residents.
Knowing this, Indonesia is building a new government capital in the jungle of East Kalimantan on the island of Borneo. Building the 990-square-mile (2,564 sq km) city, called Nusantara, is expected to cost $34 billion and last through 2045.
An estimated 1.5 million civil servants will move with the relocated government.
Of course, not every municipality can take such drastic measures. Fortifying sea walls and reshaping coasts, while still expensive, is more often in play in the United States.
The U.S. coastline is expected to rise as much in the next 30 years as it did in the past century, according to the National Ocean Service. The 2022 Sea Level Rise Technical Report projects that sea levels along the coastline will rise an additional 10 to 12 inches (25 to 30 cm) by 2050.
Jennen of PGGM thinks that the costs of climate change could increase competition among cities for attracting businesses. “Single-family housing might be the canary in the coal mine,” he says. “But commercial is a big component of every portfolio.”
Swett of Arup wonders whether postindustrial cities that suffered population loss in the last century might be able to absorb climate migrants within the United States. “Cities in the Upper Midwest like Detroit still have significant amounts of infrastructure with lower populations than in the mid-20th century. Are those places that people might go to from at-risk cities?”
Keenan warns that lower-income people displaced by climate change may move from one high-risk area to another. “We need consumer transparency to manage and convey risk,” he says.
Everyone is wondering how climate risk will play out in insurance prices and lending.
“When we talk about a 100-year flood, that’s a 1 percent annual risk of a major flood,” Siders says. “That’s a 26 percent chance of a terrible flood over the course of a 30-year mortgage.” Since flood risk is expected to increase, it remains to be seen how financial institutions and insurers will price this risk.
As climate risk increases in many areas, Keenan says, “we need to understand the cost of business as usual and the cost of future risk premiums that are already emerging in the market.”
That could lead to what he calls bluelining. Akin to how redlining left majority-Black parts of U.S. cities underfunded for decades, if banks stop offering loans or good mortgage terms for homes in flood zones, that creates a real equity issue.
“Choice is a privilege not all people have,” Siders says. The issue of climate migration is intermingled with affordable housing, land use regulation, availability of good jobs, and resilience of infrastructure. “Solving it will require a holistic picture, taking a step back to look at the community we want to build.”
Assessing the Future
Savvy investors who are tracking climate risk at the individual-asset level also need to be aware of how well prepared the communities they’re in are to handle climate change.
Swett sees investors paying more attention to the resilience of urban infrastructure and to planning and zoning boards at the local level.
“Our clients appreciate that some of the most risky elements for buildings are elements they don’t control,” he says. “A building might be looking pretty good for 20 or 30 years, but a critical piece of infrastructure in the neighborhood is not, like a substation or a critical roadway that’s below a storm-surge level. They can only control so much of their own destiny.”
Keenan recommends abolishing the ESG silo. “We need to mainstream ESG into operations, risk management, and board-level governance,” he says. “It should be part of the day-to-day challenges.”
Heitman’s Craft is encouraged by the advances in the past five years, such as flood risk data becoming available to homebuyers. A 2019 paper from the Journal of Financial Economics found that homes exposed to sea-level-rise risk sell for 7 percent less than others.
“With the growing transparency of climate data, investors and homebuyers are beginning to price that risk back into the deal,” she says.
Taylor sees “a risk that capital will not flow to places that are vulnerable; investors might turn away from perceived risky areas. For an individual institution that may make financial sense, but from a societal level, it’s problematic,” he says. “Turning off the spigot without a plan has a lot of historical antecedents about capital being taken from certain communities, which we should take caution from.”
Solutions for every place and every subdivision are going to be different. “The debate about how to solve the problem in the Netherlands is going to look different from in South Florida,” Taylor says. “But stakeholders are getting together to create ways of investing and retrofitting the built environment that can balance these tensions. It’s going to require the investment community to build its capacity to understand and engage with those conversations where they invest.”
“We might not know exactly what we need to build in Boston or New York City or Miami right now, but we know we will need protection and need funding,” Swett says. “So why not create millage that we can bond against when we need to? We need to get creative about funding now, in the way a condo association collects funding for a future roof repair, even though it doesn’t need it now.”
Recently, Jane Gilbert, Miami’s chief heat officer, spoke to the Financial Times about her general outlook for the city: will it even exist in 30 years? The answer depends on her mood, but on that day she was feeling optimistic—she put the odds at 50/50.
Addressing climate change and migration requires investors to broaden their time horizons from a 10-year holding period to longer-term thinking.
“A community might not be sustainable in 150 years,” Siders says. “People might not have to leave right now, but we don’t want people moving into those risk-prone areas in 140 years. The big question is: how do we navigate the space between now and then?”
GRACE DOBUSH is a freelance journalist based in Berlin.
