How Climate Change Is Challenging Commercial Real Estate

The commercial real estate market has been taking some hard hits recently. With more people working from home and companies cutting back on office space to save money, valuations are declining. But there’s another surprising factor putting stress on this industry: climate change.

https://www.youtube.com/live/Cjr8xbrwr1g?si=1MU-kOCV74qBVBi_

Source: COP26/YouTube

In the last few years, insurance costs for commercial real estate properties have been soaring across the country, outpacing both rent increases and general inflation. A recent report by Moody’s reveals a direct link to Climate change, especially with the increase in billion-dollar natural disasters like hurricanes and wildfires.

Let’s take a closer look at some numbers. In Miami, where the risk of hurricanes is high, rent increased by an average of 1.4% between 2017 and 2022. Meanwhile, the cost of insurance shot up by 7.5%. Similar trends are found in Denver, where nearby wildfires have caused the cost of insurance to spike by 9%.

It’s not only about the rising costs. Some commercial real estate companies are finding it increasingly difficult to obtain enough insurance at terms they find acceptable. This leaves properties underinsured against the potential damages from extreme weather events. For investors and lenders, this means taking on more risk than was once covered by insurance.

The issue is only just beginning to sink in, and its full impact on commercial real estate in the coming years, as we face more extreme weather events, is yet to be seen.

So, what can be done? Property owners can make their assets more resilient to climate-related events by improving drainage to prevent flooding or installing new roofs. There’s also a growing call for insurers and regulatory bodies to offer financial incentives to speed up these preventative measures.

Large commercial landlords like Vornado Realty Trust, Boston Properties, and Highwood Properties have acknowledged the potential impact of Climate change on their business, warning of increasing insurance costs or even unavailability of insurance on acceptable terms.

Climate change is not just a global environmental concern; it’s a “threat multiplier” that can worsen existing problems in unexpected areas like commercial real estate. Understanding these connections and getting ahead of them can not only benefit our environment but also the bottom line of businesses. The time is now for the real estate industry to address this hidden challenge and work towards a more resilient future.

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