Ep. 81: Resiliency in Residential Real Estate with Becky Becker (Equity Residential) and Lindsay Brugger (Urban Land Institute)

Outline

• How do we define climate resilience in residential real estate?

• Why is residential real estate resilience important?

• What are the major climate forces impacting residential real estate?

• Why and how should both large asset owners and individuals invest in resilience?

• What policies are governments instituting to improve resilience in real estate?

• What can individual property owners do around climate resiliency?

• How can listeners get involved even if they don’t own or invest in residential real estate?

• About Our Guests: Becky Becker, Vice President of Environmental and Climate Adaptation at Equity Residential (EQR) and Lindsay Brugger, Vice President of Urban Resilience at Urban Land Institute.

How do we define climate resilience in residential real estate?

• When we say residential real estate, we’re talking anything from single family homes and apartments to condos, townhomes, and basically any other fixed structures folks live in. 

• So what about climate resilience? According to the Union of Concerned Scientists, climate resilience is the act of “successfully coping with and managing the impacts of climate change while preventing those impacts from growing worse. A climate resilient society would be low-carbon and equipped to deal with the realities of a warmer world.”

• Responding to climate change is no longer optional. As we covered in Episode 80 on carbon removal, recent climate change research has shown that even years after the Paris agreement pledged to minimize global temperature rise by reducing our greenhouse gas emissions, we have not made progress at the scale that is needed to meet the ambitious targets set. In fact, on our current path, we will likely exceed 1.5 degrees within the next few decades. In addition to decreasing future emissions to mitigate climate change impacts in the future, we will also need to look towards other strategies like adaptation to the changing climate as well.

• So bringing these two terms together, when it comes to residential real estate and climate resilience, we can look to a definition used by ARUP, a global consultancy group dedicated to sustainable development, which defines climate resilience as “the ability to recover from, or to mitigate our vulnerability to, climate related events.” 

• Impacts of climate change are ever present and pose a great threat to our existing infrastructure. This is increasing the need to think about climate resilience and mitigation within our built environment.

• For example within residential real estate, the impacts of climate change are easy to visualize. All of the massive floods, wildfires, and hurricanes that we see with increasing frequency have direct and immediate impacts on people’s homes. In fact, as these natural disasters become more and more common, it becomes clear that, as ARUP describes, “our existing buildings and infrastructure were designed for a climate that is disappearing.” They believe that on our current trajectory, we will continue to face these severe climate impacts. So we as humans will likely need to make “fundamental changes in how we organize, design and construct our built environment to become ecologically sustainable.”

Why is residential real estate resilience important?

• First, we’re talking about people’s homes here! Making sure our homes are safe for us, our families, and our friends is of utmost importance. The United Nations mentions that access to housing is a fundamental human right. Especially housing that is “safe, secure, habitable, and affordable”. Jarringly, a recent US Census Bureau survey reported that approximately 3.1 million people were displaced by a natural disaster in 2023.

• There are obviously very important social considerations at play here. The data showed that socially vulnerable groups like people over 65, those with less than a high school education, and those with lower household incomes or were struggling with employment reported being displaced from their homes at a higher rate than other groups. Many marginalized groups are also more likely to live in areas that are at higher risk for flooding or can lack investment in storm protection measures.

• Further, as extreme heat becomes a more frequent occurrence, lower-income households and renters are less likely to have air conditioning, which has direct public health ramifications as well.

• So climate adaptation and resilience is actually critical to social equality and increasingly central to city planning, especially given that communities that have been historically marginalized by land use policies, face disproportionate risk as climate events become increasingly regular and severe. 

• Check out episodes 41 - equity in cities and 51 - Urban Greening for more about sustainable city planning.

• Second, let’s talk about the size of the industry. Zooming out to the macro level on real estate generally, we’re not talking small potatoes.

• Not including the value of residential homes, the overall market value of the industry (think apartment and office buildings, retail centers, hotels, industrial space, etc) was estimated to be approximately $17 trillion dollars at the end of 2018, the latest data we could find for the United States. Globally, this number is much, much higher! 

• In addition, from an environmental perspective, real estate drives about 39 percent of total global emissions. Approximately 11 percent of these emissions are generated by manufacturing the raw materials that are used in buildings, like steel and cement, while the rest is emitted from buildings themselves and from the generation of the energy that powers buildings while they are occupied. 

• We covered this topic back in Episode 10 on Sustainable Building Design.

• Now talking financial risk to real estate owners from lack of action. Due to the scale of this industry, a Mckinsey “study of a diversified equity portfolio found that, absent mitigating actions, climate risks could reduce [real estate] annual returns toward the end of the decade by as much as 40 percent.”

• The good news is that just by using existing technologies, the real estate industry can make progress on reducing emissions, while also saving money. For example, upgrading to more energy-efficient lighting systems and installing improved insulation have positive financial returns. Home-owners actually save money on utility bills each month when they make simple upgrades like these that allow for electricity to be used more effectively. 

• Today, newer technologies even make lower-carbon heating and cooling systems, such as heat pumps and energy-efficient air conditioning, more cost competitive in many markets and climates. These cost-effective upgrades can create meaningful change in emissions and utility bills while also making homes more resilient against negative climate change impacts. We’ll get into more resiliency strategies for residential real estate in a bit.

• And then from a physical perspective, damages can add up quickly.. The World Economic Forum found by looking at 185 extreme weather events from 2000 to 2019, that the global costs associated with climate change are around $2.8 trillion, when accounting for the cost of damage to infrastructure, property, agriculture, and human health. This equates to about $143 billion each year!

• Looking at real estate specifically, without sufficient action to prepare our infrastructure and buildings for floods, fires, droughts, and other hazards, the real estate industry faces current and future risks from:

• Increased property damages, operations costs, and business disruption

• Decreased property value, insurability, and rental/sales income.

What are the major climate forces impacting residential real estate?

• When discussing how residential real estate is impacted by a changing climate, we can break down climate risks into two major categories.

• The first is acute physical risks, these refer to the increased frequency and severity of extreme weather events, such as cyclones, wildfires, hurricanes, or floods. 

• Of these acute physical risks, Savills Research indicates that floods are the most common.

• The second, chronic physical risks, refer to longer term shifts in climate patterns (e.g., sustained higher temperatures) that may cause sea-level rise, droughts, or chronic heat waves that perhaps aren’t as immediate or dramatic as, say, a devastating tornado. 

• For more on sea level rise, check out episode 61.

• As we’ll unpack, both of these categories carry important ramifications for a given building’s resilience and on the overall portfolio strategy of an organization that is building or investing in real estate. So let’s look at what those organizations are doing to invest and implement more climate resilience into their plans, then we’ll turn to what we as individual property owners or renters can do in our own homes.

Why and how should large residential asset owners and individuals invest in resilience?

• First, let’s focus on the “why” for large asset owners, where the needed scale of resiliency investments is immense. The Urban Land Institute (ULI) does a great job of breaking this question down within its Developing Resilience toolkit. We’ll take a look at the five most important drivers, with much of this applicable to individual owners as well.

• First, there’s enhanced value, marketability, and access to capital. Resilient buildings stand out, creating a competitive advantage that can be seen through faster leasing and sale, ability to attract tenants and customers, higher resale values, and better financing. 

• Second, there’s reduced insurance premiums. As losses from climate events mount, insurance providers are offering discounts to customers that take proactive action to harden their properties. For example, the U.S. National Flood Insurance Program (NFIP) has long discounted premiums to owners for various flood mitigation measures. 

• In 2022, FM Global, an American insurer, began offering a 5 percent “resilience credit” to owners who apply risk reduction strategies to their assets, and California became the first state to require insurers to reduce premiums for wildfire-hardened properties.

• Here’s a stat that undoubtedly causes real estate owners, investors, and developers to lose sleep: According to Moody’s, Commercial real estate properties have seen insurance rates rise an average of over 7% since 2017. That’s compared to a typical yearly increase of about two to three percent.

• Third, avoided losses from damage and disruption. Climate impacts cause property damages, raise maintenance expenses, and displace residents from residential buildings. However, proactive risk reduction investments can often cost far less than the damages that would have been incurred to an unprepared building. 

• Although cost/benefit analyses vary significantly by hazard type and likelihood, risk reduction measure, and building type, FM Global found that “for every $1 a company spends to protect structures from hurricane, wind, and flood damage, estimated loss exposures decrease by an average $105 due to reduction in risk of property loss and business disruption.” 

• Analyses completed by the National Institute of Building Sciences also find benefits of certain risk reduction strategies consistently outweigh costs, by ratios of up to 13:1.

• Fourth, lower costs of compliance with regulation. Resilience-related requirements are accelerating, whether from increased support in the U.S. Securities Exchange Commission for adopting the recommendations of the Taskforce for Climate-related Financial Disclosures or through local legislation. 

• And fifth, returns for multiple stakeholders. For tenants, it delivers safe and reliable places to live and work that create less stress and disruption, and they are willing to pay a premium for them. For lenders, investors, and insurers, it delivers protection for their capital. For governments and the wider public, it delivers reduced costs from climate impacts that they would otherwise pay.

• Next, let’s review the “how”. This applies to real estate owners and occupants of any size.

• Let’s first touch on the physical, tangible residential resilience strategies that asset owners can deploy on the ground. 

• Now, this is a complex field of practice unto itself, and we can’t posit ourselves as experts here. Don’t worry, we’ll be chatting with our expert guests soon.

• In the meantime, we’ll plug and link to an incredibly thorough report published by the UN Environment Programme called A Practical Guide to Climate-resilient Buildings & Communities. It covers resilience strategies to address everything from heat waves and droughts to sea-level rise and flooding with an important, overarching emphasis on poverty and social discrimination.

• Some of our favorite examples of resilience strategies include:

• Keeping electrical, heating, and ventilation systems above flood lines or building walls to reduce moisture and risks associated with mold and fungal growth.

• Installing aerodynamic features to certain areas of a building’s roof, where corners and eaves are normally subject to higher wind pressures. Designing aerodynamic components for these areas can alleviate local pressures and help prevent roofs from being blown off.

• Developing amphibious structures, where, in the case of increased water levels, the building structure together with its supporting pedestal can separate from the mainland and float.

• Owners of real estate aren’t sitting on their hands in relation to physical risks. For example, an informal survey of developers, owners, and investors across all real estate asset types and global regions found that over 80 percent of respondents are either already using design and operations strategies to mitigate risk or will do so in the next one to three years.

• Large organizations can also lean into data and analytics to help guide their strategies on both an individual asset and portfolio wide level. These analytical tools can help owners:

• Better assess the vulnerability of current and potential properties to physical climate risks, such as flooding, storms, and sea level rise

• Evaluate the long-term financial performance of properties

• Identify opportunities to invest in properties or regions that are less vulnerable to climate risks

What policies are governments instituting to improve resilience in real estate?

• We’re not trying to cover the gamut here in the interest of time, but many jurisdictions are implementing policies related to real estate to achieve their own climate goals.

• In the US, cities like New York City, Boston, Denver, Washington DC, and Seattle have all implemented Building Energy Performance Standards (often referred to as BEPS). These standards require that buildings meet certain criteria for energy or emissions-based performance. The US Department of Energy states that these standards are helpful when combined with other building codes to help improve the energy and carbon goals for buildings. States like Colorado have implemented a state-wide performance program as well. In addition, the state of Maryland, Montgomery County within Maryland, and the state of Washington are all progressing through draft pieces of legislation. 

• We’ll link to a report from the National Building Performance Standards Coalition that breaks down which jurisdictions across the country are implementing these types of policies. As time goes on, more and more jurisdictions are likely to implement BEPS with the goal of minimizing real estate’s contribution to climate change, and it is the responsibility of owners and operators to react accordingly.

What can individual property owners do around climate resiliency?

• So you may be thinking, I’m just an individual homeowner, what can I do about my home? Well one thing you can do is research climate risks in your area. You can do this by taking a look at available resources like riskfactor.com, which is used by groups like Allstate and Redfin and is free for non-commercial use. You can also reference the Federal Emergency Management Agency, or FEMA, flood maps and other database resources, though note that FEMA uses historical data to evaluate flood risk and does not consider future climate impacts when evaluating flood risk.

• The UN’s Practical Guide to Climate-resilient Buildings & Communities that we mentioned earlier is another fantastic place to start for a broad swath of strategies. Of course, much of your own resilience strategy will be informed by where exactly you live, as different regions face different threats from a changing climate. Here are a few examples:

• If you live in an area that’s poised to get increasing amounts of rainfall, installing rain gutters to redirect water away from the home can mitigate flood risks. Or if you live in an area with an immediate fire risk, a metal roof can protect against wildfires. Upgrades like storm shutters, energy efficient appliances, and drought resistance landscaping can also help make your home more resilient against climate change impacts.

• Check out episode 60 for more on the topic of sustainable landscaping techniques.

• Lastly, as individual homeowners it is important that you take time to understand your homeowners insurance! We touched on how integral insurance is within real estate a few minutes ago. Many insurance companies are raising the rates of their plans citing increases in natural disasters, even going as far as opting out of providing coverage to those in vulnerable states like Florida and California. Previously obtaining homeowners insurance was an easy feat, but as climate change impacts increase in intensity and frequency, finding affordable coverage or coverage against fire or flood is becoming increasingly difficult.

• So if you are a homeowner, first make sure that you have insurance, but also take the time to understand what is covered, and what is not covered, within your plan so you can prepare accordingly if things do happen to your property. 

How can listeners get involved even if they don’t own or invest in real estate?

• The US EPA lists hundreds of strategies to help support climate adaptation. Refer to their list for the full scope, but here are some that listeners can act on immediately by getting involved with local organizations:

• Improve education about the risks of developing in sensitive areas

• Evaluate your city’s development incentives to see if they encourage sustainable development

• Advocate for climate-resilient practices in your community

• Assess and address the needs of people who might be particularly vulnerable and/or are likely to be most affected, especially if they live in higher-risk areas