Climate Hazards Pose $559 Billion Risk to REITs’ Real Estate

Climate hazards could cost real estate firms hundreds of billions of dollars in the next few years alone, according to a new report.

An analysis of the potential impact of climate hazards on upwards of 50,000 assets held by companies in the S&P Global REIT Index found the firms could face $110 billion in excess costs by the end of this decade, according to Bloomberg. S&P co-authored the report with GIC, the sovereign wealth fund of Singapore.

The 12-digit sum covers just a small percentage of properties — those owned by firms in the index — and figures to compound exponentially over a longer time frame. By 2050, costs could rise to $559 billion, according to the report. That represents 28 percent of the asset value of the index, as of July.

The biggest threat is heat. Nearly 90 percent of the properties of the indexed companies will be exposed to extreme heat by 2050. Other significant hazards include urban flooding from heavy rainfall (9 percent) and coastal flooding (1 percent).

The impact of natural disasters, which have become stronger and more frequent because of the warming climate, is coming into sharper focus. In the first half of this year, natural disasters caused $62 billion in insured losses, according to Munich Re — 70 percent higher than the 10-year average.

The report centers on the cost of physical risks, not property values. But climate change certainly poses real problems from that standpoint, too.

Values of once-coveted beachfront properties in places like Nantucket and Cape Cod are shrinking as coastlines do. Beach erosion forced Starwood Capital Group chief executive Barry Sternlich to demolish a Nantucket property he paid nearly $2 million for years ago.

The cost of climate hazards can be brought down by adaptive measures such as green roofs, floodproofing and more.

But those interventions would only mitigate the financial costs by $45 billion by 2050, leaving a major hole in the pockets of S&P Global REIT Index companies, and in turn, causing larger economic damage, the report concluded.

— Holden Walter-Warner