Some of the most in demand regions in the U.S. for real estate investment, most notably the Sun Belt, are also getting clobbered by the floods, extreme heat and other ravages of climate change — potentially impacting returns.
It's a worldwide challenge that is threatening to chisel away at expected returns across real asset sectors, from housing and office to retail. Some real estate managers are starting to exit properties early or decline to invest in real estate with relative good near-term return potential but at substantial climate risk.
There were 20 extreme climate disaster events with losses exceeding $1 billion in the U.S. in 2021, including one drought, two floods, four tropical cyclones and 11 severe storms, according to the National Oceanic and Atmospheric Administration, much of it in the Sun Belt, an area in the U.S. that stretches from the Southeast to the Southwest.
Between 1980 and 2021, the annual average was 7.7 events, increasing to 17.8 events on average in the most recent five-year period, 2017 to 2021. NOAA defines extreme weather as an event that costs $1 billion or more, adjusted for inflation.
The three states most vulnerable to extreme weather are all in the Sun Belt: Texas, Louisiana and Florida, NOAA said.
There’s been “an unmistakable move” of people to the Sun Belt, which increased demand for real estate in the region, especially apartments, said Jacques Gordon, Chicago-based global head of research and strategy at LaSalle Investment Management. At the same time, the Sun Belt is among the regions that are most at risk due to climate change.
Australia, the southern U.S. and the U.S.’s Eastern Seaboard had the “most acute rises in sea levels” in the developed world from 1993 to 2020, according to a new LaSalle paper on the demographics of migration.
Climate change, climate migration and its resulting impact on the value and demand for properties isn’t a theoretical issue for real estate money managers. Climate change can make owning real estate more expensive due to increased cost of insurance, mitigation strategies and possibility of stranded assets unable to attract further investment. And real estate managers’ inattention could make it more difficult for them to exit the investment before climate change takes a bite out of returns, Mr. Gordon said.
Long-term investors like LaSalle have to pay attention to the impact of climate change, he said. If property owners can no longer insure buildings, if cooling buildings gets too expensive, in a decade or less, those properties could become stranded assets, Mr. Gordon said.