What Keeps Investors Up At Night?

Some institutional investors are beginning to weigh climate risk as part of their acquisition and development decisions, determining that developing green buildings is not enough to protect their portfolios.

Executives named climate change the top risk to organizational growth this year, more than technological disruption, increased protectionism and cybersecurity concerns in KPMG’s 2019 Global CEO Outlook report.

Around 35% of properties owned by global real estate investment trusts are exposed to climate hazards, including inland flooding, hurricanes or typhoons, and sea level rise. The U.S. REITs most exposed to sea level rise are Vornado Realty Trust and Equity Residential, according to the report. The report noted that climate change “is already influencing real estate markets, with properties exposed to sea level rise in the United States selling at a 7% discount to those with less exposure.”

Much of the exposed real estate footprint is concentrated in sizable U.S. coastal cities such as New York, San Francisco, Miami and Boston, as well as overseas in Hong Kong, Singapore and Tokyo. Thus, some investors interested in the long-term viability of these coastal cities are taking notice.

Principal Real Estate Investors is taking steps for its investment management operations and recently started a climate risk assessment of one of its funds.

“We are increasingly investigating climate risks as part of our management practices,” Jennifer McConkey, senior director of operations and sustainability at Principal Real Estate Investors, said in an email. The company is “adding climate risk components to our due diligence processes and operational standards.”

McConkey thinks these issues will become “a greater part of real estate investment management in the future.”

Meanwhile, Leadership in Energy and Environmental Design, or LEED, buildings have been shown to both dramatically reduce absenteeism and increase productivity, in addition to reducing carbon emissions. LEED’s finding is that these green built environments make for a healthier and happier work environment.

Higher-end LEED certified four- and five-star office buildings in the United States also tend to command 20% higher rents and sell for 25% more at lower capitalization rates than non-LEED certified four- and five-star buildings, according to CoStar data. LEED buildings tend to charge double the rent and sell for double non-LEED buildings. They also tend to boast lower vacancy rates.


Source:  CoStar