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Q&A: Climate change effects in CRE
[fusion_dropcap boxed=”no” boxed_radius=”” class=”” id=”” color=””]A[/fusion_dropcap]ppraisers and assessors must consider climate change effects in CRE (commercial real estate). From location to preventative measures to rising costs, these effects are having a big impact on the industry. We were able to interview Larry Clark, Director of Strategic Initiatives for the IAAO, about these ongoing climate change effects. Larry answers why appraisers should consider the effects of climate change and how those effects will impact them and the commercial real estate market.
RQ: To begin, how does climate change affect commercial real estate and specifically, appraisers?
Larry: The climate has always had an impact on commercial real estate. From the decision to locate on a particular site to the types of construction materials selected to the HVAC. Those decisions were roughly regionalized in the past. For instance, every builder knows that a building on the coastline must withstand the occasional windstorm and the possible intrusion of water. Those decisions change as the occasional becomes frequent and the possible becomes annual.
RQ: Is climate change’s impact on CRE just gaining traction or has it always been a concern for assessors/appraisers?
Larry: Like everyone else, assessors/appraisers have been slow to accept and adapt to climate change. Unlike much of the general public, climate change requires appraisers to deal immediately with its impact on market value. For example, without directly acknowledging the climate changing, our colleagues must value farmland in South Dakota for its ability to grow soybeans, when in the 1960s that was not a consideration. Land sites in some parts of Florida may soon be inaccessible due to local governments’ inability to fund flooding abatement infrastructure. That will at the very least limit the market for that land, if not obliterate it altogether. Appraisers in one part of the country will have to factor frequent heavy rains and flooding into their appraisals. Meanwhile, a colleague out west may have to deal with looming water shortages.
RQ: What are the most at-risk areas for climate change effects in CRE?
Larry: Historically, commerce and its support structure grew up around transportation centers. In many instances that meant near an ocean or other body of water. Ocean ports remain an important source of commerce and a focal point of commercial construction. Unfortunately, they are already experiencing the results of climate change. Cities along the East Coast are spending millions of tax dollars each year on measures to combat the effects. These effects include rising sea levels that threaten to flood cities, introduce saltwater into drinking water supplies and ruin farmland. All these things will have a negative impact on the commercial real estate market.
A warming climate causes more moisture in the atmosphere. For some areas that translates into more frequent and heavier flooding. For others, it presents the opposite of water shortages due to reservoirs drying up. Appraisers will have to gauge the impact on each of these situations on the current market as well as attempting to project trends into the future.
RQ: Is designing better structures to endure disasters caused by climate change worth the investment? Is this a viable strategy? (e.g., fire-resistant designs, water-absorbent concrete, etc.)
Larry: These are the types of questions investors will look to appraisers to answer and those answers must be localized. The need for appraisers to thoroughly examine the real estate market and all the factors affecting it has not changed. However, the factors have changed in magnitude. For example, the ability for a building to withstand hurricane force winds has long been a consideration along the Florida coast. The ROI for that type of construction increases with the frequency and strength of storms increasing with climate change.
RQ: What are the challenges when it comes to investing in CRE locations that are known for natural disasters?
Larry: Investors will want to protect themselves by learning as much as they can about the climate challenges and stresses in a given market. They may be able to mitigate some of the anticipated damages when they determine the investment is worth the risk. Part of that determination will depend on the length of the holding period weighed against the anticipated onset of climate sourced degradation of the investment asset.
RQ: Lastly, talk about the financial impact when it comes to the effects of climate change in CRE.
Larry: Insurance companies are already reportedly basing products, such as flood insurance, on location parameters. These parameters are identified through geographic information systems that have been fed information from climatologists. Costs of constructing new commercial and industrial properties will increase with new requirements to meet the challenges of a changing climate, Further, the costs of maintenance of existing structures will also increase.
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About Larry
Larry Clark is Director of Strategic Initiatives for the International Association of Assessing Officers. His background consists primarily of local government work serving three local jurisdictions in the State of Kansas. During those twenty-eight years he developed skills in the mass appraisal of real and personal property as well as passing those skills along through teaching, lecturing and writing. His current responsibilities include serving as liaison to task force groups that are updating the IAAO standards, as well as modernizing IAAO’s professional consulting efforts.
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