Sustainability and energy efficiency are critical to ensuring longevity in real estate and avoiding premature obsolescence. However, more owners and investors are realizing the long-term importance of addressing climate risk and resilience in their portfolios. Failure to focus on these issues can result in damage to assets from increasing frequency of storms, higher turnover of tenants, inability to lease spaces, and a negative impact on investment returns.

 

Global real estate investment management firm Heitman has rolled climate risk and resilience into its core business strategy. Heitman recently set out to analyze its portfolio’s disaster preparedness and climate risk but found minimal publicly available data to help guide that analysis. For example, floodplain maps from the Federal Emergency Management Agency (FEMA) were often out of date. Heitman turned to Four Twenty Seven, a private climate risk assessment firm, for an analysis of the risks to which each of the assets in its portfolio was exposed.

 

Four Twenty Seven combines next-generation climate maps with historical disaster incidence data to calculate climate risks. Using the Four Twenty Seven technology, Heitman mapped out its risks in 30-by-30-meter (9.1 by 9.1 ft) areas. Every asset is allocated a score from 0 to 100 on parameters such as risk related to cyclones, floods, earthquakes, sea-level rise, heat stress, and water stress, and benchmarked to a database of over 1 million properties.

 

This allowed Heitman to analyze risk at the property level and create retrofit budgets accordingly. It also allows the firm to calculate climate risk at the portfolio level, shaping future investment decisions. By arming itself and its investors with these data, Heitman integrates risk and resilience decisions into everything from due diligence to acquisition strategy and building upgrade opportunities.

 

“ Our clients expect us to quantify risk and opportunity at the property level, to guide our investment choices,” says Mary Lugdin, senior managing director/head of global research, Heitman. “Climate-related risk has been largely ignored by the real estate investment industry until recently. Investors counted on insurance to protect them against such risks. We see that approach as short-sighted. New tools are being developed that allow us to make smart investment choices that will hold up through the holding period for assets.”

 

In addition to internal practices, Heitman desired to understand investor perspectives and industry best practices. As part of that effort, the firm partnered with ULI to jointly publish the research report Climate Risk and Real Estate Investment Decision-Making.