Office Hours: Jeremy Healey on How Real Estate Can Prepare Communities for Climate Risk
Over the past several years, Washington, D.C., has experienced serious effects of climate change through record-breaking weather events, including heat waves, snow storms, higher-than-usual tides, as well as heavy rains and flooding, according to the District of Columbia’s Department of Energy and Environment.
A 2014 study by Climate Central reports that the nation’s capital could witness record flooding that could damage approximately $4.6 billion worth of properties by 2040, affecting up to 1,400 people across 400 homes. The findings also state that economically disadvantaged populations are expected to be disproportionately impacted by these weather-related events.
The Steers Center for Global Real Estate at Georgetown McDonough organized a flash flood simulation this past fall, which brought together academics, district and federal government employees, and private investors to gauge the impact that flooding and rising sea levels would have on D.C real estate infrastructure and how public and private sectors could respond to the damages.
Jeremy Healey, adjunct professor and ESG fellow at the Steers Center, recently published a new whitepaper titled Underwater Assets: Washington, D.C., and Climate Change that analyzes and discusses the flash food simulation’s findings, short and long-term takeaways based on the data collected, and evidence-based plans to mitigate future flooding risks in the region.
What were the main findings from the flash flood simulation?
From the simulation, we found that it is possible to use tools developed in other industries and recalibrate them to use for assessing climate risk in the real estate and citywide environment. For example, we partnered with insurance experts to recalibrate tools that they had developed for their unique purposes to look at climate risk at a building-specific level.
We also found that in events like a hypothetical flash flood in D.C., city officials will focus on socially vulnerable populations and those who don’t have economic resources to pull from. While this may be a rational decision for local government, it is potentially bad news for real estate investors.
We also found that although our participants came up with really exciting ideas for mitigation strategies that one can take to minimize the impact of these types of weather-related events, none were dramatic enough to shift the risks that we’re looking at significantly. All investors will still need to rely on their own devices.
Our key takeaways, first and foremost, are on the investment side. One, there will be an ongoing cost to climate change, which is not in current modeling for real estate assets. So, when you are looking at valuation, one must have to start to take this into account. Climate risk will have a bottom-line impact that very few people are accounting for. The second takeaway is the importance of insurance — it wasn’t a major focus within the exercise, but an enormous amount of our follow-up work has to do with insurance and its availability, which is a critical issue for investors, homeowners, and businesses.
Another key takeaway was on investment portfolios and the need to deep dive into what you own today to determine your comfort with the current climate risk. And finally, our last takeaway is just the sheer need for new tools, solutions, and technologies to help address some of these ongoing issues. We see an enormous demand for them from investors, businesses, and homeowners. We think it’s a source of opportunity for people who understand how to help solve these complex issues.
How did receiving input from a wide variety of expertise and professional backgrounds — such as ESG experts, investors, and government personnel — shape your research findings?
Receiving input from a wide variety of expertise and professional backgrounds gives the research a different focus. We found that the conversation around climate change is very fractured. The government has a distinct conversation. The real estate and investment ESG community have a distinct conversation, and for most investors, ESG and climate haven’t really begun to impact their investment decisions.
Bringing people with such diverse areas of expertise to work together helped indicate how real some climate risk challenges are. It had a clear impact on some of the significant investment professionals in the room, which was really our focus from the beginning.
From your findings, was there anything that surprised you?
One thing that jumped out to me from the research is how much climate risk there is in non-obvious places. Everyone worries about the rivers in D.C. for very good reason, but the impact of flash floods, or interior floods, are the types of risks that are growing exponentially as climate change continues to impact our environmental and infrastructural landscape.
What are some of the mitigation strategies you propose in your research? What are some hurdles they could face?
Every community must strategize on climate change by looking at it for themselves locally. There are obvious places with a lot of attention: the Miami’s of the world, the Houston’s, or the New Orleans’ type of cities. We picked D.C., not just because it’s Georgetown’s home but because it’s very removed from the obvious sources of climate risk. We’re not on the waterfront and we’re not in a fire zone. A lot of the headlines we see day-to-day don’t cross your mind when you think about this type of geographical area.
There’s nothing in the climate space that’s uncontroversial. For example, one of the things that we focused on is that the area we studied is not historically considered a flood risk, so it doesn’t show up on the FEMA flood maps. If you went to take out a loan in this area, you wouldn’t be required to purchase flood insurance. One of the strategies that were proposed was to update all of the flood maps to take on this more forward-thinking perspective. Ironically, the biggest pushback we’ve seen to that proposal is actually coming from the cities themselves. They’re desperately afraid of what they might find in that analysis.
We’ve found that these cities are worried that updated maps might starve their capital access, that they might not be able to develop the housing they need, or that they will discourage the movement of new businesses to the area. So, even in the most affected areas with people who are most well-intentioned, there’s real resistance to some of these findings.
Other research proposals included a whole host of great ideas on improved metrics and ways to score and analyze potential climate risk. There were specific proposals on engineering solutions, or on things that could be done with the layouts of streets, and ways that buildings could be configured to provide emergency support in terms of relief after a climate event.