Resilience: managing real estate in an increasingly volatile environment

Today’s topic is resilience, the second of our 6 Trends Driving Sustainability in Real Estate series. The concept of resilience has recently gained more and more attention among investors of all asset classes. For real estate, the term resilience represents an important mindset for fiduciaries to examine how to mitigate risks, anticipate issues, and protect investments from negative impacts due to climate change, natural disasters, and hard to predict “Black Swan” events.

Significant efforts are emerging, particularly at the city level, on developing and implementing resilience strategies in urban settings. Recently, organizations such as the Urban Land Institute, the American Planning Association, and the U.S. Green Building Council have come together to jointly define resiliency as “the ability to prepare and plan for, absorb, recover from, and more successfully adapt to adverse events.” Critically, they also state that there is an economic imperative to successful resilience strategies: “…the promotion of resilience will improve the economic competitiveness of the United States.” In many ways, resilience is the opposite side of the coin to sustainability. Where sustainability is about prevention and mitigation of climate risks, resilience is focused on adaptation and continuation. To explore and refine industry thinking on resilience, the Rockefeller Foundation has pioneered the organization 100 Resilient Cities, and the Urban Land Institute is working with the Kresge Foundation on numerous grants to advance discussions on resilience across North America.

The context for these developments is that the “frequency and severity of disasters has dramatically increased in recent decades”. According to the National Oceanic and Atmospheric Administration, in the U.S. alone, the number of billion-dollar weather disasters has risen since 1980, with notable storms including Hurricane Andrew (1992), Hurricane Katrina (2005), and Hurricane Sandy (2012).

Increased attention to resiliency can also be seen in job growth, public policy initiatives, and private sector research. New positions are beginning to emerge in the public sector, such as the “Chief Resilience Officer” to help communities focus on resilience and develop resilience plans. Discussions on resilience as part of public policy are accelerating. For example, the Obama Administration has encouraged a host of initiatives to incorporate resilience strategies into building codes, and some cities are exploring changes to floodplain regulations that no longer apply, given outdated weather models and FEMA maps. Major insurance, re-insurance, and risk companies are leading research and analysis on the impacts of climate change. Swiss RE, a prominent re-insurance provider, has changed their insurance models to incorporate climate risk. The World Economic Forum has released a Global Risks Report identifying “failure of climate change adaptation and mitigation” as one of the most concerning risks to its members. And, the World Energy Council recently published a report identifying climate change as a significant threat to the global availability of energy, water, and food.

Considering these developments, we believe that resilience strategies should integrate with overall investment management practices. In our view, this requires closer attention to our transactional activities such as due diligence, risk assessments, and evaluation of investment opportunities. It requires us to continually evaluate our management practices and policies, and work with our property management and joint venture partners to better identify risks and incorporate resiliency strategies in our daily decision making. Further, it also requires us to broaden our perspective and examine risk potential across geographic, market, or even ecosystem viewpoints, as they can all ultimately impact the performance of our real estate investments. Our consideration of these issues in our decisions today will help guide the success of our real estate investments and our clients in the future.

See you next time when we discuss the next trend in our series: “Performance – greater pressure to achieve and evaluate results.”

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