Real estate managers may have increasing access to physical climate risk data but few know what to do with that information, an issue a new paper by the Urban Land Institute and LaSalle Investment Management aims to address.
According to a LaSalle analysis, 34% of the $850 billion in U.S. commercial real estate tracked by NCREIF Property index in the fourth quarter was located in high and medium-high climate risk zones.
This is ULI and LaSalle’s second joint paper on the topic. Their first paper, released in 2022, focused on obtaining and interpreting reliable climate data.
“What we learned is there is no perfect data,” said Julie Manning, global head of climate and carbon at LaSalle Investment Management. "In fact, one of the mantras that I said like a broken record to my team is that you need to understand what the data is telling you but also what the data is not telling you.”
The new paper provides a framework for incorporating physical climate risk into real estate underwriting.
The first step is to make sure the data isn’t wrong, Manning said. “You know the building. You know the location it’s in. Does that (data) make sense to you?” she said.
In one instance, climate risk data flagged a risk for flooding because the property was a certain distance from a river, she said. What the data provider didn’t know was that the property was on a hill that was several hundred feet from that river, Manning said.
Once the risks have been accurately identified, managers need to analyze the cost of mitigating those risks, the report shows.
And that mitigation is very particular to the property in question, she said. For example, LaSalle has a logistics property in Osaka, Japan, which is a flat coastal city where buildings are required to be 3 meters above sea level. Due to the coastal flood risk, LaSalle executives decided to raise the buildings another 1.5 meters and located equipment at higher levels, Manning said.
