Real Estate Climate Risk & Adaptation Strategies

With the increasing sensitivity of real estate investments to physical climate risks, investors and owners must double down their efforts to adapt against potential shocks to property values, market demand, and returns on investment, through technological innovation and advanced strategies.

This article explores why real estate investors should develop an interest in climate risk, the importance of prioritising asset-specific data in climate risk assessment, and some crucial adaptation strategies for long-term resilience.

Risks emerging from climate change are growing concerns for the real estate economy, also affecting the financial market (particularly mortgage lending and property insurance) that sustains it.

Over the past years, the financial losses from disaster events such as hurricanes, floods, and wildfires across North America and other parts of the world have been increasingly evident.

The increased frequency and severity of events, such as hurricanes and wildfires, were major contributors to the rise of at least 20% in the average price of US property insurance between 2020 and 2024. Additionally, home insurance claims in Canada reached a staggering $7.7 billion in 2024, largely due to extreme weather-related damage.

As these risks continue to expand into an unprecedented threat, you can be forced to either redirect your investments or exit from markets in high-risk areas to safeguard your capital and minimise losses.

In general, here is what climate risk could imply for you:

• Decreased property values and increased operating costs

  Climate change can lead to a decrease in property value due to increased events like flood risk and heat stress, among others.

  For example, the 2024 major wildfire events in California are correlated with a 2.2% decline in home values in areas surrounding affected zones, according to real estate expert Dr. Hongwei Dong.

  Aside from decreased property values, operating costs can increase due to the need for climate-resilient infrastructure such as seawalls, levees, and blue and green roofs. The UNEP-Fi also warns that rising heat and water stress, for instance, will lead to increased operating costs for buildings due to higher cooling demands, water prices, and inefficient measures.

• Higher insurance premiums

  As climate risks are on the rise, property insurance premiums are also likely to increase, making it more expensive for you to protect your assets. Even Canadian provinces with relatively minimal climate-related damage faced a surge of 7.7% in home insurance rates earlier this year.

• Lending and collateral valuation risks

  While property values decrease amid climate disasters, the value of collateral used to secure loans is also susceptible to decline, which can, in turn, cause an increase in lending risks.

  Furthermore, such an impact can also lead to increased default rates for active borrowers, therefore reducing the value of their loan portfolios.

  Damage from hurricanes, for instance, can affect property values, leading to a rise in the loan-to-value (LTV) ratio and an increase in mortgage defaults.

  This is equally supported by a recent study, "Climate Stress Testing for Mortgage Default Probability", showing that events such as tropical cyclones with return periods of 1-in-500 years or 1-in-1000 years considerably increase default probabilities, posing therefore a substantial risk to coastal areas in particular.

These implications highlight key areas where your investments are most vulnerable to climate-related risks and why understanding and managing these risks are crucial.

In this context, leveraging precise and reliable data to make informed decisions will also play a key role in adapting investments effectively.

High-level climate risk scores alone are no longer sufficient to indicate the health status of investments vis-à-vis climate risk impacts. These scores provide a general overview of climate risk but lack the specificity required for informed decision-making.

Supported by a recent analysis, this implies that granular, asset-specific data are essential for understanding the specific climate risk origination, scope, and impact for each property.

Asset-specific data, including geolocational data, geographical information, asset prices, asset types, residual types, asset resiliency, and capacity, improves real estate due diligence by providing a detailed, rather than overall, understanding of the magnitude of climate risks to physical assets.

This data enables investors to assess specific risks such as flood risk, heat stress, or wildfire risk in areas where a physical asset is located. With such information, investors can make adequate decisions about property acquisitions, renovations, and dispositions.

For assessing a specific risk, such as flood risk, for example, a recent study on the Local-Oriented Approach (LOA) suggests a detailed vulnerability assessment of regions with specific data, including administration divisions and the type of building, to assess flood effects on property values better, enabling investors to quantify flood risks to specific properties.

Focusing on LOA can bring a deeper understanding of the climate risks associated with their localised properties, and can make more informed investment decisions.

As your interest in understanding the link between climate change and real estate grows, it is essential to examine how physical risks emerge from climate-related events that threaten the real estate market. Rising global temperatures, generated by greenhouse gases that conserve more heat in the atmosphere, are the trigger to more frequent and severe weather events, floods, hurricanes, and wildfires.

As temperatures crossed the 1.5°C level last year and uncertainties looming in 2025, Climate X's Climate Scientist Lead, Dr. Nicholas Leach (and other colleagues), warn that while “this 1.5°C milestone is not the same thing as the 1.5 pursuing efforts Paris threshold”, effects of this change are already felt on across humans and ecosystems, including infrastructures.

This means that as global temperatures continue to rise and climate-related events worsen, you can expect heightened physical risks impacting your investment returns and physical assets in the near future.

Here are some key physical risks and how they can affect your real estate investments:

• Increased frequency and severity of extreme weather events

  This means that properties are more likely to be affected by intense weather events like storms, heatwaves, or droughts, which can cause damage, disrupt business operations, and impact occupants' safety. These are directly contributing to financial losses.

• Sea-level rise and coastal flooding

  Properties located in coastal areas are at risk of flooding, erosion, and saltwater intrusion, which have the potential to cause considerable damage and loss of value.

• Heatwaves and urban heat island effects

  Properties in urban areas may experience higher temperatures, heat stress, and air pollution, which can impact occupant health, productivity, and comfort.

Without a resilient upgrade, property demand will likely decline as the properties become unattractive, ultimately leading to a loss of income.

Case Study: Impact of Repeated Flooding on Italy's Housing Market in 2024

In 2024, devastating floods struck Italy, particularly in Emilia-Romagna.

When researchers investigated the flood's impact on Italy's housing market, they found that the flood did not significantly reduce property prices in at-risk areas, unlike in the US.

However, properties in flood-prone zones sold for 1% less than those located in safer areas. This price gap widened to 4% in regions frequently hit by floods. The study suggests that repeated flood exposure, not isolated events, drives the incorporation of flood risk into property prices.

When considering the financial implications of adaptation in real estate, it is important to first recognise the long-term benefits of adopting proactive measures.

Investing in climate-resilient buildings and infrastructure will enable you to reduce spending on insurance premiums, minimise repair costs, and enhance property values.

A joint study by Allstate and the US Chamber of Commerce found that "each $1 of investment in resilience and disaster preparedness reduces a community's economic costs after an event by $7", saving, among other things, repair costs.

The benefits of Climate Adaptation

• Homes with climate-resilient features, such as flood-proofing or wind-resistant design, may qualify for lower insurance premiums, as they are less likely to suffer damage or losses.
• Climate-resilient properties can face minimal needs for costly repairs or replacements, as they are better equipped to withstand extreme weather events.
• This implies that climate-resilient properties can command higher sales prices or rental income, as they offer a safer and more sustainable investment opportunity.

Case Study: The Business Case for Climate-Resilient Development in US Real Estate

Allstate and the US Chamber of Commerce have quantified the economic benefits of climate resilience in a recent report.

The study shows that a $10.8 billion investment in resilience measures could yield significant returns, including $184,000 savings, $26 billion in preserved economic production, and $17 billion in reduced economic costs.

Notably, every dollar invested in disaster preparedness generates $13 in savings.

As essential steps to adapt to rising climate risks, you should prioritise:

• Using advanced climate data tools:

  This can support your investment decision-making processes, as you identify potential climate risks and see emerging opportunities. This can give you a competitive advantage in the market and at the same time protect your investments from climate-related losses.

• Investing in property-level climate resilience

  This is relevant to address future physical climate risks, minimise potential losses, and maintain property values. Investing in climate-resilient construction and design can guarantee that your properties remain viable and valuable in the face of rising climate risks.

• Scaling up adaptation measures by leveraging ESG expertise

  This can be useful as you look to integrate climate resilience into your investment strategy and decision-making processes. Leveraging the expertise of ESG teams can help ensure that your investments are aligned with relevant (often regulated) standards around environmental, social, and governance concerns. This can also help reduce your reputational risks and create new investment streams.

Looking at key considerations to develop climate adaptation strategies, Better Building Partnership (BBP) - UK's leading property owners group - equally suggests essential steps such as:

• Identifying physical climate impacts that may affect assets and supply chains

  It enables you to understand the specific climate-related risks associated with your properties and investments.

• Determining the potential Climate Value-at-Risk (CVaR)

  This helps you quantify the potential financial impacts of climate change on your investments. Estimating the CVaR is helpful to understand the potential losses or damages that could occur if no adaptation measures are taken.

• Building resilience at the asset level

  It enables you to take targeted actions to improve the climate resilience of individual properties or assets. Implementing measures such as flood-proofing, climate-resilient design or even energy-efficiency systems can reduce the physical risks associated with climate change and maintain the value and viability of your assets.

• Integrating adaptation into the investment lifecycle

  This is relevant to ensure that climate resilience is considered at every stage of your investment process, from initial investment to ongoing management and eventual divestment.

Considering these steps in addition is relevant to help you protect your assets, manage risk, and maintain long-term value.

As you look to future-proof your investments against physical risks, adopting a forward-thinking and proactive approach is the way to go.

This involves a number of undertakings, ranging from utilising advanced technologies to incorporating climate resilience into property valuation and due diligence:

• Leveraging AI and big data for climate risk management

  This approach can help you reduce financial exposure, improve resilience, and capitalise on emerging opportunities in the resilient real estate market by tracking your riskiness with technologies that capture real-time and accurate data.

  While you can make more informed decisions and reduce your financial exposure, it is important to note that AI and big data can be integrated in the development of tailored adaptation strategies, providing solutions for your capital expenditure (CapEx) and return on investment (ROI).

  At this point, Spectra and Adapt might be the solution you have been looking for.

• Investing in climate-resilient buildings and infrastructure

  As mentioned in the above sections, you can invest in buildings and infrastructure that are designed and built to withstand the impacts of climate change.

  This will help you reduce your financial risk and enhance the value of your property.

• Incorporating climate resilience into property valuation and due diligence

  When evaluating properties, you should consider not only climate-related risks but also their potential impacts on property value, occupancy rates, and rental income.

In your due diligence, you should seek answers to questions such as:

• What types of climate risks is the selected property exposed to?
• Are there any existing or planned climate resilience measures in place?

Keep in mind that there are essential key performance indicators (KPIs) to track, including:

• Climate Risk scores
• Expected loss or damage from climate-related events
• Costs associated with climate resilience measures
• Potential impacts on property values
• Occupancy rates or rental income

These KPIs play a crucial role in supporting investment decisions by providing vital information to identify areas for risk reduction and optimise returns on investment.

Effective adaptation strategies can effectively address the growing and significant risks climate change poses to real estate investments.

Property investors and owners can protect their assets and maintain returns by incorporating climate resilience into investment decisions and utilising data-driven insights.

In addition to these approaches, leveraging emerging technologies and the expertise of climate data providers to enhance climate risk assessment and adaptation are crucial steps in adapting to the evolving climate risk landscape.

If you want a deep dive into how climate risk affects asset valuation, and how to identify, assess and manage the financial risks associated with climate change, download our whitepaper below.