Climate change will have a drastic, disruptive effect on the commercial real estate sector over the next several decades as rising temperatures make some areas less habitable and increasingly intense storms and rising sea levels erode the value of coastal real estate, according to the opening speaker at ULI’s Resilience Summit, part of the 2019 Fall Meeting in Washington D.C.
Spencer Glendon, a Harvard-trained economist and fellow at Woods Hole Research Center in Falmouth, Massachusetts, gave attendees a blunt warning: in the near future, the rapidly warming planet threatens to alter long-held assumptions about the value of land and buildings and jeopardize the viability of projects in some places, particularly in urban waterfront areas.
That paradigm shift will be enforced in large part by insurers and financing sources, who will regard what traditionally have been desirable locations as unacceptably risky.
“You’re going to stop being able to build buildings in bad places,” Glendon said.
But flooding will not be the only risk to real estate values. As temperatures rise, cities such as Washington will become more difficult to live in. By the 2040s, he said, the nation’s capital will have about six weeks each year in which it is so hot that it will be dangerous to go outside.
Glendon said scientists have discovered that ancient cities first began to develop when the planet entered a period of climate stability, allowing humans to give up being nomads and settle in places that remained desirable for long periods, such as Cairo’s location in the Nile delta. “The nice places stayed nice,” he explained.
But such stability will be a thing of the past as the climate rapidly changes, he said. Parts of the world that currently have moderate average temperatures also happen to be the wealthiest areas, and there will be fewer of them. In addition, extremely violent storms that used to be a rarity will become more frequent.
These changes are coming fast. By the period between 2041 and 2060, Glendon predicted, “everyone will need flood insurance.”
Though Glendon is associated with a scientific institution that works to reduce greenhouse emissions, he comes to the issue from a business perspective. Before joining Woods Hole, he spent 18 years as a partner and director of investment research for Wellington Management, a firm with more than $1 trillion in client assets. In addition to his doctorate in economics, he holds a bachelor’s degree in industrial engineering from Northwestern University.
Glendon grew up near Detroit, and as a young person in the 1970s and 1980s he watched the Motor City’s startling decline in population and wealth due to the loss of automotive manufacturing jobs and other factors.
But the economic destruction that Glendon envisions due to climate change could be even more cataclysmic. Though climate scientists’ predictions have been shown to be accurate, he said, the real estate sector so far has not paid much attention. But with the climate increasingly destabilized, he predicts that financial markets will become reluctant to offer longer-term loans.
“There will be a loss of duration,” Glendon said. “It is madness to lend for 30 years in many places.”
Also, “we will see a loss of commercial insurance in many places,” he said, as insurers grow wary of paying out successive claims in areas that have been repeatedly flooded and rebuilt.
Rising seas, more intense storms, and heat are likely to cause significant population shifts as well, as residents in some places are forced to move. That will increase the projected economic costs of climate change, which are based on the assumption that people will stay in one place. “We have no idea what happens when people move because we’ve never seen a migration like we’re about to have,” Glendon said.
That, in turn, will make it imperative for the real estate sector to plan for more slack, even if buildings are not quickly occupied, because it will be more difficult to predict demand. “Inventory will become good,” Glendon predicted.
At the same time, though, Glendon noted that the construction and operation of buildings accounts for 40 percent of U.S. greenhouse gas emissions. He urged developers to focus on meeting demand by retrofitting existing buildings rather than by building new ones.
Glendon also implored commercial real estate companies to band together and press government to impose more stringent regulations to combat climate change and lessen the damage from its effects. “You need to change the incentives so that everybody complies,” he said.
Rather than hurting profit, regulation could help protect value and the potential for growth, Glendon explained. He cited the example of how the great Chicago Fire of 1871 led to enactment of more stringent building codes and establishment of city fire departments across the nation. “They were created because nobody would write insurance otherwise,” he said. As a result, massive fires that devastated cities eventually became a thing of the past, and urban real estate became a safer investment.
Glendon said that even if individual developers put climate remediation features such as walls to protect waterfront buildings against flooding into their projects, it would not do much to protect their value, because other nearby buildings and access roads will still be under water. “There’s no solution to this that’s building by building,” he said.
Glendon also urged cities to join forces with surrounding suburbs and coordinate their efforts to deal with climate change at the regional level. “Leaving the city’s problems to city residents is a bad solution,” he said.
It also is imperative that the United States and other nations move as rapidly as possible toward producing zero greenhouse gas emissions, Glendon said. “If we don’t, civilization will be in real trouble,” he warned.
