Climate change and its associated weather events are having profound impacts on the commercial real estate sector. From insurance rates to energy bills to property repairs, the costs associated with owning and operating commercial real estate are rising as the planet warms. Understanding the key ways that climate change affects commercial real estate can help building owners and managers budget for and mitigate these increasing costs.

Climate Change Is Driving Up Commercial Real Estate Costs

Key Impacts of Climate Change on Commercial Real Estate Costs

• Increased insurance premiums - Insurance companies are raising premiums across the board to account for escalating risks and claims from floods, storms, wildfires, and other disasters made more likely and more extreme by climate change. In coastal regions, the increase in premiums can be double or more compared to just five years ago.
• Higher energy bills - Hotter summers and more extreme heat waves mean buildings require more air conditioning and energy to maintain comfortable temperatures. This drives up electricity costs significantly. Buildings in areas with milder summers are also needing more cooling than historically necessary.
• More frequent repairs and replacements - From roof damage caused by severe storms to flooding that ruins interiors, the physical impacts of climate change will necessitate more frequent repairs and replacements. Parts of buildings like roofs, windows, and exterior features may need upgrading to withstand intensifying weather.
• Devalued properties - Commercial real estate in vulnerable areas like coastlines may decrease in value as insurance costs and risks escalate. Flood-prone regions in particular could see building values decline. This also impacts rents and occupancy rates.
• Stricter regulations - Governments are implementing tighter building regulations and requirements focused on climate resilience and energy efficiency. Meeting these can require expensive retrofits or upgrades. Regulations on emissions may also increase costs.
• Tenant preferences shifting - Businesses may begin looking to rent in more climate-resilient areas as extreme weather events disrupt operations. Areas perennially impacted by fires, flooding, or storms become less desirable.

Cost Mitigation Strategies for Building Owners

While climate change will continue driving costs up, commercial real estate owners can take proactive measures to mitigate the financial impacts:

• Invest in retrofits - Upgrades like installing storm-proof windows, elevating mechanical systems, sealing entry points, and adding flood barriers can minimize physical damage and reduce insurance rates.
• Switch to renewable energy - On-site solar panels or purchasing clean power offsets can stabilize energy costs despite grid price fluctuations. This also minimizes a building's emissions.
• Consider location - When evaluating new acquisitions or development projects, factor in long-term climate impacts on that region. Prioritize more resilient areas.
• Engage tenants - Tenants want sustainable, efficient spaces. Providing climate amenities like EV charging and renewable energy can boost occupancy rates.
• Leverage green certifications - Achieving LEED or Energy Star certification signals a climate-friendly, low-emissions building which may increase value.
• Install smart systems - Smart thermostats, water heaters, HVAC, and lighting systems optimize energy use, lowering bills.
• Use reflective materials - Cool roofs, sun-reflective windows, and pavements minimize heat absorption, reducing cooling costs.
• Landscape for resilience - Strategic landscaping choices like drought-tolerant or native plants can reduce water usage while providing shade and storm protection.
• Access financing - Government and utility grants, rebates, and low-interest loans can help offset the upfront costs of upgrades and retrofits.

The costs associated with preparing for and responding to climate change will become an increasing reality for commercial real estate owners and operators. However, taking proactive steps now to minimize future financial risks and improve building resilience in the face of escalating climate impacts can help stabilize expenses and protect property values over time.

Q&A on Climate Change and Commercial Real Estate Costs

Q: How is climate change impacting operating expenses for commercial buildings?

A: More extreme weather driven by climate change is significantly increasing operating expenses for commercial buildings in several key ways:

• Energy bills are rising as hotter temperatures require more cooling and air conditioning. Severe heat waves can overburden HVAC systems.
• Maintenance and repair costs are increasing with more frequent major storms, flooding, wildfires, and other disasters damaging building exteriors, interiors, and systems.
• Insurance rates are spiking given the escalating risks and claims insurers face in many regions due to climate-related losses. Premiums can easily be 2-3 times higher than just a few years ago.
• New regulations requiring building upgrades and retrofits to improve energy efficiency and resilience also drive up costs.
• Water bills may rise in drought-prone areas that implement restrictions and higher rates due to water scarcity.

Q: What locations or building types are most vulnerable to climate change impacts?

A: Coastal regions, flood zones, and areas experiencing hotter, drier conditions are most vulnerable. Building features also play a role:

• Coastal commercial real estate faces rising sea levels, harsher storms, and flooding. Low-lying areas are most at risk.
• Flood-prone regions are vulnerable to frequent inundation, especially buildings without flood barriers or elevated systems.
• Drought-stricken areas may contend with higher water costs and landscaping expenses. Fire risks also increase.
• Buildings with outdated systems, poor insulation, or leaks are less resilient to extreme weather.
• Large-windowed structures require ample cooling for heat waves and more storm protection.

Q: Should business owners relocate from high-risk areas due to climate change?

A: Relocating from extremely high-risk regions should be considered. However, building upgrades can also mitigate risks in many locations:

• For properties facing frequent flooding or coastal surges, relocating may be the only option. Damage and costs can be unsustainable.
• In very hot regions, the costs of air conditioning and power may make some properties cost-prohibitive. Relocation could help.
• Before relocating, assess the cost-benefit of upgrades like elevating systems, installing storm barriers, improving insulation, or switching to renewable energy.
• Weigh the costs of relocating against retrofitting to meet climate risks. Upgrades may suffice if the location works logistically.
• Get an assessment of future climate impacts based on the area and property details to guide the stay vs. relocate decision.

Q: What building modifications help reduce climate-related costs?

A: Many upgrades can substantially improve climate resilience while reducing energy bills and minimizing insurance claims:

• Cool roof systems reflect heat and can lower indoor temperatures by over 20°F.
• Barriers like floodgates, berms, and permeable pavements protect from heavy rain and surges.
• Elevating critical systems avoids damage if flooding occurs.
• High-efficiency HVAC equipment sustainably regulates interior temps.
• Insulation seals thermal weak points and enables efficient cooling.
• Solar panels and clean energy procurement cut electricity costs.
• Smart water fixtures and native landscaping reduce water usage.
• Impact-resistant windows and doors withstand high winds and storms.
• Flood sensors provide early warning of leaks to prevent water damage.
• Back-up power systems keep properties operational during outages.

Climate change is increasing costs for commercial real estate owners in major ways. More extreme weather is driving up insurance premiums, energy bills for cooling, maintenance, and repairs due to storm damages, and expenses for meeting tighter building regulations focused on resilience and emissions reductions. Coastal and flood-prone regions as well as properties with outdated systems are most vulnerable. Building owners can take steps to mitigate costs by investing in upgrades like storm barriers, elevating critical systems, installing solar panels, and pursuing green certifications. However, some highly exposed properties may need to consider relocating. With proactive upgrades to improve climate readiness, commercial real estate can become more resilient in the face of escalating impacts. But owners will need to factor in these rising costs driven by climate change as the new reality going forward.