💼 Planet B

briefcase | invest smarter | Issue #150

The 28th meeting of the United Nations "Conference of the Parties" on climate, known as COP28, takes place in Dubai on November 30th. We’ve created the hottest climate change pickup lines for attendees to honor this auspicious occasion. You're welcome, internet.

🥰Are you climate change? Because when I look at you, the world disappears.

🥰 Is that an iceberg the size of Delaware breaking off the Antarctic ice shelf, or are you just happy to see me?

🥰 I hope you’re not powered by fossil fuels, because you’ve been running through my mind all day.

🫢 Here’s an ice breaker…

We've spoken at length about climate risk and explored weather we humans have a planet B. Short answer, we looked, and it’s next on Elon’s todo, but so far, we don't have a planet B. And things are getting worse.

We’ve seen weather events intensify across the globe over the years, with 2023 looking to become the hottest on historical record.

Now that’s hot.

You know climate change is getting real when your beachfront condo comes with a snorkel.

Here are a few statistics to situation our thinking…

• 😥 1 in 3 Americans experienced a weather disaster this summer — WaPo

• 🌊 200 million people worldwide will be displaced by rising sea levels by 2100 — PNAS

• 🌀 2020 was a record year for hurricanes — NOAA

• 💦 23 million properties are currently at flooding risk — Redfin

• 🤯 Real estate contributes to 30% of total greenhouse gas emissions — UPenn

Real estate is one of the most affected sectors by climate change, forcing migration, damage susceptibility, insurance challenges (more on that later), and carbon emission challenges.  According to Redfin, 10% of home buyers and sellers say climate risk is the primary reason for their move. 

The reality is our buildings account for about one-fifth of all greenhouse gas emissions. 

The UN’s Intergovernmental Panel on Climate Change released a 3,000-page report 😴😴 highlighting real estate's impact on global temperatures. Don't worry you don't have to read it; we made Peter the Intern do it.

Here are the two key highlights:

• Space: We have to reduce the footprints of our buildings. This can be done through greater building density, enabling more multi-functional spaces, encouraging the circular use of materials, and building more shared spaces.

• Decarbonization: Governments must incentivize the private sector to decarbonize buildings. In doing so, the UN predicts we can mitigate up to 85% of emissions in Europe and North America by 2050.

Further, UN data shows that around 75% of the carbon emitted during a building’s life cycle comes from construction and demolition, and just 25% from lifetime operations.

Therefore, the most energy-efficient building is one that isn't built. Or, smaller footprint housing is better from an environmental standpoint, such as mobile and tiny homes.

🌊 Sea, We Told You

According to a second study, rising sea levels will see around 4.4 million acres partially or fully underwater by 2050. 

Not 'underwater' from a debt and cash flow basis, literally under the water.

Further, the same study found that at least $108B of property value is at risk from rising seas. This not only has dramatic implications for owners and investors but for tax collectors as well.

The research found that tax revenue losses are in the billions of dollars from rising sea levels: Florida ($7B), Texas ($5B), and NC ($4.5B).

🔥 It's Just Wild (Fire)

It's not just hurricanes and rising water we need to factor into our climate calculus. Wildfires are raging as well. One recent study found that "71.8 million homes have some level of wildfire risk in 2022, growing by 11.1% to 79.8 million by 2050, owing to the impact of a changing climate."

This finding becomes bleaker when you consider that there are a total of 146M homes in the U.S. currently.

🏦 Lender Bender

Banks are beginning to stress test against climate risk and expect this trend to continue. For those properties with higher climate risk, perhaps the LTVs will be much lower, or a risk premium will be added to interest rates. 

Further, smart folks like McKinsey believe that portfolio valuations will soon factor in climate risk premiums.

A new Zillow survey found that increased flood risk corresponds with heightened mortgage denials and an uptick in borrowers withdrawing their mortgage applications altogether.

👀 Elusive Insurance

The insurance conundrum is probably the most serious short-term implication for real estate. Many insurance providers, such as All-State and State Farm, have refused to do residential business in states like California and Florida due to their exposure to climate events.

Not that you have to pay an arm and a leg, but you couldn’t even get insured in some of these at-risk locations.

We all think the threat of climate change comes from above-ground events, but if things couldn’t get worse, now we have to worry about underground climate change.

A recent study in Nature explores the silent impact of underground climate change on civil infrastructure.

Yikes…If overground climate impacts weren’t enough, climate change has now gone underground. Time to start looking at planet B.

So What? Climate risk is not priced into most property values yet, but it will soon be. Just as investors should stress test their portfolios against rising interest rates, vacancies, valuation drops, and cost overruns, they must now consider climate risk. If we don't, the banks will.