Physical Climate Risks and Underwriting Practices in Assets and Portfolios | Urban Land Institute

Real estate firms integrate climate-risk data into underwriting to preserve long-term asset value.

The increasing availability of climate data has transformed the real estate sector’s ability to evaluate physical risks, though effectively integrating this data into decision-making remains a challenge. Leading firms are actively incorporating physical climate-risk assessments into their underwriting, acquisition, and portfolio management practices, acknowledging that these risks can influence long-term asset values.

Differences between firms highlight various stages of adoption. Early-stage firms struggle with interpreting data, while leading firms use it to guide asset-level decisions. Regulatory frameworks, such as ISSB standards, push for greater transparency, but companies remain focused on balancing compliance with strategic investments. Geographical variations also influence risk perception, with U.S. firms more attuned to physical hazards like hurricanes and wildfires, compared to Europe’s emphasis on transition risks.

In underwriting, firms are increasingly budgeting for resilience measures to “harden” properties, incorporating capital expenditures for flood defenses, fire prevention, or structural adaptations. Uncertainties in cost forecasting persist due to evolving best practices and technology. A conservative strategy includes applying a premium to exit cap rates for high-risk markets, typically adjusting 25-50 basis points.

Disposition practices reflect cautious approaches to disclosure of climate risks. While proactive sellers highlight mitigation efforts as selling points, most firms still rely on buyers’ independent assessments. Collaboration with external consultants helps bridge expertise gaps, ensuring proper evaluation and mitigation planning.

As firms align investment strategies with climate resilience, knowledge diffusion across organizations is crucial. Integrating climate risk into portfolio strategies ensures long-term value preservation while enhancing decision-making processes for real estate investments.

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