WEATHER-RELATED RISK – Commercial Properties Increasingly Vulnerable
A NEW report highlights the risks to commercial real estate owners from natural catastrophes and climate-related disasters, which are happening with increasing frequency. The report by Heitman LLC, a global real estate company, in conjunction with the Urban Land Institute, found that the increasing risks from catastrophes are bringing new challenges to commercial property owners in terms of risk mitigation and securing appropriate property coverage, which may become more difficult in the future.
There are two main risks facing commercial property owners: physical and transitional risks associated with increasingly volatile weather.
Physical risks – This includes catastrophes, which can lead to:
• Increased insurance premiums
• Higher capital outlays
• Increased operational costs
• Decreased liquidity
• Falling value of buildings
Transitional risks – This includes economic, political and societal responses to climate change and more volatile weather that can make entire regions or metropolitan areas less appealing due to increasing weather events.
Fallout from extreme events
Costs to repair or replace damaged or destroyed property.
Property downtime and business disruption.
Potential for increased insurance costs or reduced/no insurance availability
The report notes that commercial property owners in areas that have seen regular catastrophes have started seeing either higher premiums for their property policies or decreased coverage.
Main impacts facing property owners
First, there are catastrophic events, like extreme weather such as hurricanes and wildfires. Gradual changes in temperature and precipitation – such as higher temperatures, rising sea levels, increasing frequency of heavy rain and wind, and decreased rainfall – are likely to exaggerate the impact of catastrophic events.
This can affect commercial properties in the form of:
• Increased wear and tear on or damage to buildings, leading to higher maintenance costs.
• Increased operating costs due to the need for more, or alternative, resources (energy and/or water) to operate a building.
• Cost of investment in adaptation measures, such as elevating buildings or incorporating additional cooling methods.
• Potential for more damages from weather events.
• Higher insurance costs or lack of availability.
What owners are doing
Survey respondents said that they currently use insurance as their primary means of protection against extreme weather and climate events. But 70% of real estate and hospitality industry managers said they had seen an increase in rates in the year to the end of the third quarter of 2018, with an average rise of 9.1%.
While insurance will cover damages from catastrophic events, it will not cover loss in value if investors start shying away from an area due to vulnerability to natural catastrophes. Although insurance might provide short-term protection, more property owners and investors are looking for better tools and common standards to help the industry get better at pricing in climate risk in the future.
• Mapping risk for the properties they currently own.
• Reviewing climate risk and catastrophe susceptibility before purchasing new properties.
• Using mitigation measures around their properties.
• Working with local policymakers to support investment by cities in mitigating risk.