On Aug. 9, 2021, the Intergovernmental Panel on Climate Change (IPCC), a United Nations body responsible for assessing the state of climate change and reviewing the science behind it, released a very stern warning in its most comprehensive climate change report to date: “It is unequivocal that human influence has warmed the atmosphere, ocean, and land.”
This was probably the least frightening part of that report, though it marked the most stern, pointed blame coming from the IPCC in the time it’s been compiling these reports. The takeaway was that humans have absolutely caused an increase in the planet’s temperature, to the tune of roughly 1.1 degrees Celsius. This doesn’t sound like much, until you consider that this is a global average -- some places will see a larger gain; others could see deeper drops.
The hotter the planet gets, the more water is released from big, cold things like frozen glaciers and from bodies of water via evaporation, causing violent shifts in weather patterns (does any of this ring a bell yet?). More water means higher sea levels, and more water also means more glacial melting, giving us even more water. And this is only one way that that 1.1-degree Celsius of warming can mess up a pretty precisely tuned instrument like planet Earth.
So what does it mean to real estate investors?
For real estate investors, the most important takeaway from the report is this: The weather on this planet is becoming increasingly unstable due to human activities, and it’s doing it a lot faster with each passing day. That’s why we’re seeing busier hurricane seasons, more violent flooding events, larger wildfires, more destructive winter storms, and increasingly unhinged weather in general.
There are many financial consequences here. There’s literally no place on this planet currently untouched by climate change, even if you don’t realize it yet. But real estate investors don’t get to play innocent for much longer. No matter where you’re based, you’re going to soon see some very real fiscal consequences of climate change -- if you’re not seeing them already.
For example, areas experiencing more violent weather and more wildfires are getting harder to insure. And the very last thing you want is a property with no insurance on it in a place with a more unpredictable climate. Be that flood insurance, hurricane insurance, fire insurance, or what have you, you need your investments to be protected from violent weather. And as areas become more risk-prone, they’re going to be rated accordingly, which may cost you a great deal of money over time.
You may also find the cost of rebuilding going up, since more damage to more properties will be driving demand for already-limited building materials. To protect yourself, as you repair, you should be thinking of ways to engineer those damaged buildings to withstand more violent weather.
Climate change also causes interior climate control systems to work harder, increasing wear and tear on equipment and costing tenants more money. This could lead to higher vacancy rates, should tenants decide to move to a newer building or one retrofitted to perform better.
These are just a few of the ripples on the pond at the moment. They may, in turn, lead to decreased real estate values (or increased values, if your properties happen to be in areas experiencing less violent weather). For an asset class that tends to be held as a long-term investment and treated with the assumption that it will always gain in value, simply by the passage of time alone, climate change is making real estate in many areas look pretty unstable.
The Millionacres bottom line
There’s no one recipe for success in the face of such a widespread issue, but there are a few things real estate investors can be doing now to protect and future-proof their investments.
For those holding real property, the most obvious action items are to ensure that your buildings are up to the task of defending against increasingly violent weather patterns. Check your insurance, and know what it’s going to cover and for how much.
Retrofit buildings to comply with green building programs like LEED, which can help you reduce carbon emissions and make your building more efficient in general. That’ll reduce climate control costs to your tenants, too, which may help keep them over the longer term, no matter the weather.
If you’re making new investments, consider where they’re located and what the weather has been like there lately. Odds are good that it’s only going to get more dramatic in the coming 10, 20, or 50 years. So, if there are wildfires 20 miles away now or the sea level nearby has risen by a foot, this might be a signal to look elsewhere.
There’s likely to be a trickling migration of population to safer areas in the interiors of continents, which could mean Midwestern cities like Chicago and St. Louis will be the place to be a few decades down the road.