An increase in natural catastrophes – and pressure from insurance companies and regulatory reporting requirements – has pushed a growing number of real estate businesses to prioritize building resilience and climate initiatives.
North American real estate managers are increasingly ranking building resilience above other objectives, a recent Verdantix survey of 300 real estate and facilities decision-makers found.
Building resilience is now a top priority for 27% of real estate managers, up from 14% in 2022.
Meanwhile, North American real estate managers are seeing a more significant ESG, decarbonization, and sustainability strategy impact than counterparts in the EMEA region, at 58% versus 47%.
The findings come as real estate businesses that do not get on board with resilience improvements could run the risk of insurers “pulling the plug” on firms with insufficient measures, Claire Stephens, research director smart buildings, Verdantix, has warned.
They could also face investors “shunning” companies that perform poorly on sustainability, Stephens cautioned.
Business continuity impacts from natural catastrophes and weather events, regulatory requirements including SEC climate disclosure rules, and insurance cover concerns are all likely to be affecting how real estate companies approach resilience risk, according to researchers at Verdantix.
In the US alone, there have been 25 confirmed weather events with losses exceeding $1 billion in 2023, according to National Oceanic and Atmospheric Administration (NOAA) data. Events across the US and Canada have ranged from floods, to severe convective storms, to hurricane impacts, to wildfires and drought.
Four of the 10 costliest economic loss natural catastrophe events in the first three quarters of 2023 were in the US, and this included three severe convective storms and Hawaii’s Maui wildfires, according to Aon analysis.
However, nine out of 10 of the global costliest insured loss events over the same period were in the US, Aon found.
Insurers have moved to limit personal lines insurance exposure in key US states, including hurricane-prone Florida and wildfire exposed California, while commercial property insureds have also felt the pressure.
“The fact that [real estate managers are] saying that resilience is now a concern and that they’re acting on that, and the fact that that’s even met being mentioned as so significant a factor in decision making processes and such a high priority means there is highly likely to be an insurance reason behind it,” Stephens told Insurance Business.
In one example, a Floridian senior services real estate manager shared with Verdantix that resilience has become a huge focus due to increased premiums “over the last few years”.
“The organization has been trying to build some new buildings, and he’s trying to get those insured and the premiums are increasing drastically for those,” said Ben Readman, Verdantix industry analyst. “Mitigation strategies, from his perspective are really important right now to be able to either assess whether it’s worth acquiring new buildings in the locations that they are, or to potentially either not build them or go to a different area.
“It’s starting to influence their strategies quite fundamentally, depending on which market they are in.”
Historically, Verdantix research has suggested that sustainability has been a bigger focus for real estate managers in APAC and EMEA, regions in which ESG efforts have been more advanced and pronounced.
However, 2023 has presented a step change when it comes to North America’s sustainability focus in comparison to other regions, according to the Verdantix survey data.
“What we’re seeing this year is, despite the political environment around ESG in North America, an increasing focus on sustainability,” Readman said. “It’s a bigger driver of strategies in America than it is in Europe at the moment.”
While more real estate businesses were prioritizing business resilience ahead of other focus areas, 28% of real estate managers said that it remained their least pressing objective.
“There’s a fundamental issue within the real estate sector of failing to appropriately quantify acute and chronic short-term and long-term risks to their assets,” Readman said.
The real estate sector has traditionally focused on areas like flooding, but emerging risks – such as how an HVAC system will perform in unseen temperatures during a heat wave or how storm drains will respond during a major event – and new information may not be being categorized accurately.
“These are new areas for people to start thinking about and they aren’t thinking about them extensively until it starts to really impact their business,” Readman said. “That’s probably why we’re seeing the US in particular start to pick up on climate risk, because the impacts, whether that’s storms or heat waves, are increasing and it’s starting to impact their business continuity.
“Not everyone’s quite on board with it yet and it’s very difficult to be able to assess, because you need an awful lot of data to be able to model and be able to assess what the actual material risks are for your building, so it’s an issue of novelty.”
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