Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Is Sustainability the Greatest Opportunity of the Decade?

Marcia Cuenca
November 16, 2022
Podcast - Is Sustainability the Greatest Opportunity of the Decade?

Welcome to the first episode of a special series we recorded with our friends from Urban Land Institute.

This series is brought to you live from ULI’s Fall Meeting in Dallas that featured over 45 sessions, 150 speakers, 240 events, and more than 5,500 members in attendance.

Decarbonization is the idea of reducing carbon emissions in the built environment, decarbonizing."
- Marta Schantz

Featured on this episode:

Marta Schantz, Executive Director, ULI Randall Lewis Center for Sustainability in Real Estate

Our first interview is with Marta Schantz. She discusses highlights from her panel at the Fall Meeting; Financing Decarbonization: The Great Real Estate Investment Opportunity of the Decade?

Elena Alschuler, Head of Sustainability for the Americas, LaSalle Investment Management and a member of ULI Washington

Elena shares insights from her panel at the Fall Meeting: How to Choose, Use, and Better Understand Climate Risk Analytics. 

Lindsay Brugger, Vice President, ULI’s Urban Resilience Program

Lindsay shares insights from her panel at Fall Meeting: Demystifying Climate Preparedness: How to Prepare Our Buildings and Cities to Weather Climate Change.

Climate change is now, it's not a future issue."
- Lindsay Brugger

About Resilience Summit
The 4th annual Resilience Summit will be held on May 15, 2023 in conjunction with ULI’s Spring Meeting in Toronto! This exclusive event will bring together leaders in the field of real estate and resilience to share practical solutions to protect communities and investments from climate risks.

Learn more about the Resilience Summit

About ULI Randall Lewis Center for Sustainability in Real Estate
The ULI Randall Lewis Center for Sustainability in Real Estate is dedicated to creating healthy, resilient, and high performance communities around the world. Through the work of its Greenprint, Building Healthy Places, and Urban Resilience programs, the Center provides leadership and support to real estate and land use professionals to invest in energy efficient, healthy, resilient, and sustainable buildings and communities.

About ULI
Dedicated to advancing Urban Land Institute’s capacity to connect, inspire, and lead, the ULI Foundation leverages its charitable 501(c)3 organizational status to secure and manage philanthropic assets and partnerships. This extraordinary tradition of ULI member altruism and goodwill serves to benefit and grow the ULI mission, changing millions of lives and improving communities around the globe.

Links

Learn more about ULI
Download the ULI, LaSalle Climate Risk Report

How to Choose Use and Better Understand Climate Risk Analytics

Firebreak: Wildfire Strategies for Resilience

Water Wise: Strategies for Drought Resilient Development

How the Real Estate and Insurance Industries can Prepare for Extreme Weather Events

ULI Randall Lewis Center for Sustainability in Real Estate
Five free First Street Foundation report downloads for ULI members

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Transcript

Adam Hooper (00:03) Hello and welcome, I’m RealCrowd CEO Adam Hooper, and this is the Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights, and investment strategies that passive investors can use to build real estate portfolios that last.

Disclaimer (00:21) All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions to gain a better understanding of the risks associated with commercial real estate investing. Please consult your advisors. your advisor.

Adam Hooper (00:41) Welcome to the first episode of a special series we recorded with our friends from the Urban Land Institute. This series was brought to you live from ULI’s Fall Meeting in Dallas that featured over 45 sessions, 150 speakers, 240 events, and more than 5,500 members in attendance. It was truly an honor to be a part of the event as real estate leaders from around the world came together to tackle the most important and pressing challenges in real estate today.

Adam Hooper (01:09) In today's conversation, we're joined by Marta Schantz and Lindsay Bruger, both of the Urban Land Institute and Elena Alschuler of LaSalle Investment Management. Our first interview is with Marta Schantz, co-executive director at the ULI Randall Lewis Center for Sustainability and Real Estate. She discusses highlights from her panel at the fall meeting titled Financing Decarbonization: The Great Real Estate Investment Opportunity of the Decade? To learn more about Marta, the Fall meeting in the ULI Randall Lewis Center for Sustainability and Real Estate, be sure to check the show notes. With that, let's get to the conversation.

Adam Hooper (01:47) Well, Marta, thank you so much for joining us today here after your panel at the ULI Fall Meeting. It was packed, by the way. It was standing room only; I know because I was standing. Tons of really amazing information there. So first, why don't you tell us about the work that you do at ULI and then we'll dive into the panel.

Marta Schantz (02:05) Absolutely. So, ULI Urban Land Institute. We unlike a lot of other industry groups, we don't lobby. And so, because of that we put a lot more emphasis on thought leadership. And so, our content team is massive and within that content team is our sustainability team. Where we have upwards of 20 staff looking at everything across the sustainability board from decarbonization to resilience to health and social equity. And it's all rooted in the business case. So, we are looking at the business case for sustainability in real estate.

Adam Hooper (02:35)  Yeah, I like the approach there, right? It's not just about the academic side of it. It's what is the actual hands-on impact of that and how can people use that information to make better decisions, which is fantastic.

Marta Schantz (02:45) And we've got a pretty wide audience in terms of the membership of ULI. Some folks very early on their sustainability journey, some who are just bleeding edge and doing the most innovative app projects and activities possible. And so, we also make sure that our content is relevant across the board, whether you're just starting out and need to figure out the 101 on what to do for sustainability, or those who really want to push the envelope and figure out what's next.

Adam Hooper (03:13) Yeah. And so, your panel this time was about financing decarbonization. First let's maybe start with, what is decarbonization?

Marta Schantz (03:23) Decarbonization is the idea of reducing carbon emissions in the built environment, decarbonizing. That's my simplest definition I can give.

Adam Hooper (03:33) Perfect. And then the financing of it obviously is a huge question. Right? Where across the capital stack pays for it effectively. As a developer, and one of the things you talked about in the panel. Is a developer accepting a slightly lower IRR? Are the banks going to offer reduced basis points?

Marta Schantz (03:54) And other times folks are just funding it with their own internal capital because that's their business as usual nowadays.

Adam Hooper (03:59)  Yeah. And so, I think one of the conversations that we just had, again. Real Estate is a for-profit enterprise?  Everything comes down to what's my net return on this. And so, what are some of the different programs out there that you're seeing or maybe some of the newer emerging programs that are coming out there to change this? I'm going to bite the bullet and invest today for some future potential. To making that an easier decision to make today, right? I think that seems like that's such a big leap of faith of we don't know yet what the downstream returns of these investments are going to be necessarily, so how do you make that decision today?

Marta Schantz (04:45) Right. And well also because the upfront cost for sustainability is sometimes higher, right? When you're thinking about decarbonizing an asset and the additional technology investment upfront. How do you make sure that the returns on that do come through in the end? There are a couple of different financing vehicles that we're seeing real estate firms look into to help address this. One of them is green loans. So, Fannie Mae and Freddie Mac for example have multifamily loans where if you reduce your energy and water use about 30% beyond code. Then they give you reduced basis points on a loan. It’s straight up, it's quite simple and the uptake for those programs has been really strong. And so, we're starting to see more of those green loans come out. Where institutions are offering funds that have reduced basis points to see that improved performance on the sustainability side. So that's one thing we're seeing.

Adam Hooper (05:37)  And that's a now effect, right?

Marta Schantz (05:38) That's a now impact. We're also starting to see more issuances of green bonds. And this is the idea that a real estate company will issue a green bond for half a million dollars or something. And inevitably it is almost always oversubscribed because the appetite from the investor market is so high to invest in these green bonds and in other vehicles that are tied to ESG. And then those funds are used in anything in their real estate portfolio related to green buildings that could be developing a lead certified building, upgrading an existing facility to net zero, installing renewables. It is a pretty widespread of what can be included in that, but you also tend to get a better cost of capital for those green bonds than you would for a traditional bond from the market. And so that's another thing that we're seeing real estate firms do to work, to decarbonize at scale as opposed to one building at a time, like really going big.

Adam Hooper (06:34) And that also seems like a now impact, right? How else are you seeing developers’ price this in? That's one of the things that we've seen in our industry trying to price in the ESG aspect of it. And there isn't really necessarily a dollar-for-dollar calculation that you can run. And so, is it more of just we have to will this into being, and we'll see what the downstream effects are, or how are you seeing people actually start to put some calculated financials around these initiatives?

Marta Schantz (07:08) It’s a great question because we're seeing a lot of anecdotal evidence. That,  these green funds and these green buildings and this decarbonized future really does pay out and really does have those returns that the folks are looking for. But we're not seeing the numbers as often as we would like. It's very hard to show the quantifiable green premium. And especially for a merchant developer or someone who really doesn't hold that asset, they developed for a long time. If you do hold it for a long time, those operational savings are just tremendous. And so, the value is there. You reduce your operating cost, you increase your net operating income through a cap rate on there, you increase your asset value. Right? Yeah. And that very proven, very wonderful. But for those quick develop and sell type of examples, that is still a little tricky to establish for certain. But we're starting to see some qualitative cases of how this is happening more and more. We're starting to see buildings lease up faster when they're green or have this decarbonized net zero future, we're starting to see investors seek specifically green buildings to purchase and acquire and invest. A lot of companies are incorporating ESG or carbon sustainability in their due diligence process when they're thinking about acquiring a property. And on the flip side, they're also thinking about it for their exit strategy. How am I going to handle ESG? What data do I need to include? How do I position this property just right for exit? Because they know that whoever's going to buy the property,  X number of years down the line is going to care. Even more than folks care about it today. And so, they're kind of planning ahead in that way. Notice I didn't give you any numbers and I wish I could. But we continue watching the market and we're hopeful that over time those numbers will, come to fruition in a more obvious way.

Adam Hooper (09:01) Yeah. And I think the term that was used in the panel was the greenium, which is a great term.

Marta Schantz (09:05) Who needs a green premium when you have the greenium?

Adam Hooper (09:09)  But I think what you mentioned there too is looking at the future buyers, right? And then when you think about the cost of retrofit versus the efficiencies that you can build on a ground up, right? So, I guess, again, hard to put numbers around it, but just as a concept, certainly seems like there's concern of, if you're not doing that today, the next buyer is either going to pass because it's not up to a certain standard or they're going to underwrite the cost to retrofit. Which is likely going to be more expensive, 5, 10 years from now in the future, then you can do it today. So, I think that's hard to quantify, but that's maybe where that mentality has to be at. We have to will this to happen today on taking some betting on the come there for that.

Marta Schantz (09:53) And the savvy real estate leaders are already thinking about this. We're calling it transition risk when it comes to climate. The idea that it's not physical climate risk. Where will the building flood, which should also be incorporated. We're just talking carbon right now. It's this transition risk concept the where the regulatory and economic factors of sustainability are going to result in your building being stranded because it's financially obsolete. And so that's what you were getting at with this idea that over time, if tenants don't want to lease the space, if owners don't want to buy the property, if investors don't want to invest in the fund anymore, you're in trouble. And so, planning ahead for that and getting in front of it gives folks a real competitive advantage.

Adam Hooper (10:37) And so now, Net zero is a concept that's been thrown around for as long as I think we can probably remember. What does that actually mean?

Marta Schantz (10:45)  Net zero. Is the concept that of a building that is completely powered by renewable energy. So, it ends up being that any of the energy used is green and ends up with no carbon emissions, net zero carbon.

Adam Hooper (11:00) And so that's on an operational basis. Something that was brought up I think as a question from the panel was are we talking about the embedded carbon in the construction, in the products itself versus the operations? And so, when you say net zero.

Marta Schantz (11:20) So Adam Net Zero has many definitions across the buildings industry right now. So, you ask 10 people, you're going to get 10 different definitions of net zero. And there are plenty of organizations trying to give a standard definition. Ashray is working on one NBI, the New Buildings Institute. All sorts of organizations are working to standardize exactly what Net Zero is. In my perspective, it matters that we're moving forward. Any improvements is an improvement. And so when we think real estate's journey to net zero. What we see included in that is energy efficiency. Making an asset or a portfolio as energy efficient as possible first. Then thinking about onsite renewable energy, thinking about electrification and grid interactivity so that all power can be green from that renewable, electric future grid. And then the residual emissions would be offset by renewable energy credits or carbon offsets or otherwise.

Marta Schantz (12:14) And so that's the carbon operations piece, as you mentioned. And then we start thinking about embodied carbon. And that's the carbon emissions associated with the upfront building materials creation and construction itself. Concrete and steel are the two biggest offenders. When it comes to embodied carbon, and it's very much on our radar. We're talking about it; we're looking at it. And right now, when we're talking about net zero, we generally lean toward just looking at operations because that is a bit more actionable for our members at the moment.

Adam Hooper (12:43) Yeah, and I think, again, anytime you're trying to incentivize change having quick, measurable wins. That that goes a huge way and kind of changing the behavior, so yeah it's interesting.

Marta Schantz (12:54) Granted what I mean, embodied carbon. I really don't want to diminish its importance though. Because when you look at the life cycle, carbon emissions of a building. Half the lifecycle carbon emissions of a building are from the embodied carbon of the upfront materials. So, it's a significant consideration when it comes to any sort of building development, design and construction and we're working to help our members address that as well.

Adam Hooper (13:16) And on that front, I guess I am wrong in thinking that the embodied carbon issue is only for new construction? How can you disembody carbon from existing structures that carbon's already been put in the equation, right?

Marta Schantz (13:31) Embodied carbon is unfortunately not just something to look at the beginning.

Adam Hooper (13:39) Disembodied  carbon, we're about Halloween time, so I can say disembodied carbon. Is that a thing? I don’t know if that's a thing.

Marta Schantz (13:42) Well, can I talk about vampire loads too? Cause I always love that, making those jokes. For embodied carbon, disembodied. That's funny. There is the upfront embodied carbon of building. Really structural materials to get that in in place. But then we think about fit outs every time a new office tenant comes in, every time you redo the interiors of a hotel room. Or a multi-family apartment or otherwise, all of the materials that go into that process add up over the life cycle of a building as well. So, we need to think about building interiors and the embodied carbon of those fit outs over the life cycle of the building in addition to the structural upfront embodied carbon of the building materials themselves.

Adam Hooper (14:23) How about vampire loads?

Marta Schantz (14:25) Thank you. So, when it comes to energy efficiency and energy use in a building, plug loads, plug and process loads, like all the appliances you plug in, they're often called vampire loads because even when they're off, they still suck. They still draw and suck as a vampire might some power from the outlet. And so, there are all sort of ways that the efficiency community is trying to encourage building occupants to reduce their plug and process load. Or these vampire loads, some might say spooky, right? Watch out the vampire loads are sucking all of your power. But as buildings become more efficient on lighting and HVAC and those type of typically larger loads, plug and process loads, or the vampire load type of pieces are becoming a larger piece of the pie that need to be addressed. So, it's bit of a tangent, but vampire loads, watch out.

Adam Hooper (15:12)  We'll watch out. So, what are you excited about in terms of where this whole industry and conversation is going?

Marta Schantz (15:19) I'm excited about a lot of things. I will say one of the things I'm excited about most. Integration with the utility grid and that's a piece of the puzzle that is going to help balance those future brownouts and blackouts with supply and demand challenges from the utilities. But it's also going to help buildings as they become more innovative and as they become more smart with Internet of things and smart technology optimized operations where they go back and forth with the grid with distributed energy resources like batteries on site, solar panels to optimize their carbon emissions and optimize their costs. In an incredibly sophisticated way. I am so excited about the potential here because not only does it alleviate the stress on the utility grid, but it also improves the asset at the building itself and then you start thinking about the electric vehicle boom that's going to come in all of the charging strategies there, and it's, the potential is immense and I just get really excited about that.

Adam Hooper (16:20) And that's a very complex problem that requires a lot of interconnected parties to all kind of get on the same page, right?

Marta Schantz (16:27) Absolutely. It's not easy, but it's something that a couple years from now, everyone's going to be thinking about how do we get our building to be more grid interactive? How do we do it in an efficient way? How do we do it in a low carbon way? How do we get our utility on board? It's going to be really interesting.

Adam Hooper (16:45) Great. Well, let our listeners know how they can learn more about these kinds of things and the work that ULI is doing

Marta Schantz (16:51) Go to ULI's website knowledge.uli.org and look for any of the information that we have around sustainability. We also have a compendium of all of our net zero related resources at ULI.org/netzero So, check it out.

Adam Hooper (17:07)  Thank you again to Marta for taking the time to join us. Next up is Elena Alschuler. Elena is the Head of Sustainability for the Americas at LaSalle Investment Management and a member of ULI as well.

Adam Hooper (17:19) In this interview, Elena shares insights from her panel at the fall meeting. How to Choose, Use, and Better Understand Climate-Risk Analytics. Don't forget to check the show notes to learn more about Elena, LaSalle, and all the reports discussed in this segment. We hope you enjoyed this conversation with Elena Alschuler. Elena, thank you so much for spending some time with us at the fall meeting. Why don't you start, tell us a little bit about your work with LaSalle. What your panel was about today.

Elena Alschuler (17:47) Sure. So, I'm the LaSalle Head of Sustainability for the America's Region. We've got about $30 billion of assets under management across all asset classes, so office, retail, multi-family, industrial. Single family homes, some more unusual asset classes you might not have heard of. And in my role, I work really closely with portfolio management, acquisitions and asset management on all thing’s sustainability and climate risk. So that goes from the high-level setting of goals and strategy to developing resources, updating our processes like acquisitions and due diligence process, and then actually getting things done at the assets. So, implementing energy efficiency and climate risk hardening improve.

Adam Hooper (18:30) And so your panel today was how to choose to use and better understand climate risk analytics. What does that mean in practicality? What are some of the analytics that you're looking at, and then how is that affecting your investment decisions?

Elena Alschuler (18:44) Sure. So, we went through a pretty protracted process of assessing climate risk analytics providers over the past couple years and saw that a lot of our peers were running into the same challenges. And so that's why we wanted to really bring the conversation out into the open and to the whole industry could benefit from this and not be reinventing the real or struggling with the same, questions themselves. So, we're trying to just get a handle on what physical risk of different climate events, of our assets, floods, hurricanes, as well as chronic events like, heat waves and things like that. So, we went through a big process. We assessed a bunch of climate risk providers. We ended up selecting one main one with some others as supplements, but what we saw was a lot of inconsistency in how the analysis is being approached. So, the baseline assumptions, how the models are done, which hazards are included. The one example I like to give that I think makes it really clear is one provider that we looked at, included existing risk and another provider did not include existing risk and because of that, the second provider didn't flag any of our Florida assets for hurricane risk.

Adam Hooper (20:04) Fairly non-intuitive.

Elena Alschuler (20:08) Right? So, you look at these results and you're like, wait a second, how come all of our assets in like Baltimore and New York and Boston are getting flagged for hurricanes. But our assets in Florida are not. And their answer was, oh well we don't only look at forward looking change in risk. We just assume that all of the existing risk is already priced in today. You could have a debate about that. But also if you didn't know that and understand your provider's methodology, you might make the wrong conclusions. Or if you're an investor and you're getting climate risk analysis from different investment managers who are using different climate risk providers. One portfolio could show up as being much higher risk because they're including baseline risk. Or another portfolio is not. And so you would get misleading results comparing those two portfolios just because of the differences in the methodology.

Adam Hooper (21:02)  Yeah, that was one thing that you mentioned on the panel too, was creating well generally speaking a similar language, but getting some of these terms a little bit better to find. So, we're all kind of speaking from the same, playing from the same deck, if you will. And to that, you mentioned physical risk and then transition risk. What are the differences between those two risks?

Elena Alschuler (21:21) So I think when a lot of people think about climate change, they're thinking about physical risk. And that's the planet is warming, that's leading to more extreme heat and cold, water related hazards, like increased frequency and intensity of rain and snow and more droughts in other places. coastal flooding, hurricane, landslides, like that's all the physical climate risk. And then the transition risk is all of the regulatory and market and technology changes that are happening as a result of the physical risk. So increased regulations in cities for building energy performance or for climate hardening, changes in tenant, investor demand, changes in technologies of ways of constructing buildings or different systems that you're using in buildings. So those all have costs associated as well.

Adam Hooper (22:15) And so you mentioned also these first pass analyses are kind of like the flag to maybe ask more questions and then once you've identified those risk. How are those currently being? You mentioned maybe they're being priced in, maybe they're not. How are you actually taking these analytics and these risks that you're discovering? Are you underwriting those differently? Are you including those as Capex down the road? How does that look at from a capitalization and just underwriting perspective?

Elena Alschuler (22:41) Yeah, so at this point, we are, it is in every deal memo for new acquisitions for us. We've also done a portfolio level analysis, where we've identified a small number of our existing assets that are high risk and we're needing to dig in more on those. As you mentioned, no one can predict what's going to happen with the climate to like the second or third decimal point. And say like exactly in what year it's going to happen or whatever. And so, it really is a matter of flagging high, Medium low. We need to take a closer look at this asset. Also, the climate risk analysis is often looking at a physical location a spot on a map, but not necessarily looking at the physical construction of the building.

Elena Alschuler (23:27) So once you start digging in, you could say, oh, look like the HVAC system is actually on the roof instead of in the basement. Or they elevated the site, there could actually be, information that you find out about the building that makes it less at risk or you dig in and you say, Okay, they need a flood barrier. Or, you have more severe concerns that's going to need like major hardening. So, intervention is needed. Really depends on, how severe we think the risk is. But it is something that we're looking at acquisitions. We have definitely passed on a couple of deals where when we considered the level of hardening that would be needed, it no longer penciled for us. And so we didn't pursue that deal and then we do have a handful of properties where we're digging in on what might need to be done at that property. And then going forward it really becomes just another factor that is part of overall risk management and diversification in a portfolio. You're not going to have zero risk, but you might want to geographically diversify, not have all your assets in the same place in Florida. Or sort of think about it overall from that perspective.

Adam Hooper (24:32) And then you mentioned also when you're acquiring an asset, you're looking at the next buyer's exit. So, you're looking at this, not just your exit, but the person that buys this. How is this going to affect their ability to exit? Because that's obvious. Playing the same decisions, you're making now on the buy. That's a really long-term horizon. Right? So, are you able to price that in today? Is it more of just this kind of, is this more of an art still? Are we getting to where it's more of a science? Like how do you actually consider the buyer's exit 20 years from now when you're acquiring something today? That seems like a pretty tall task.

Elena Alschuler (25:04) Yeah, I think, a lot of real estate underwriting requires using many assumptions and being as informed as you can about them. And having the best sort of error bands and sensitivity tests and things like that. So, you have to know that any assumption in your underwriting is not exactly what's going to happen. But in terms of the next buyer's exit, we're thinking about that because when we sell the property in say, 10 years, the buyer of the property is thinking about how they're going to sell the property in 10 years. Right? And so, all of that sort of collapses all that time into today's value. And so, we are personally not changing our exit cap rates but we saw in the interviews that were done for the ULI paper that some of our peers are starting to consider as something that would influence exit caps. For us, it's more a matter, I guess it's a little more subjective in terms of we're looking at how high risk the asset is. We're looking at what could be done to mitigate physically the asset and putting that into CapEx or just into our overall decision of whether it's a good asset to acquire.

Adam Hooper (26:19) Yeah. And we'll have links in the show notes to the paper that you guys, publish. So definitely recommend clicking on that and reading it. And then you mentioned also, positive density in certain markets, right? Where there's so much real estate value to protect. How, again, it seems like a Hercules effort to try to actually quantify some of these things, right? I mean that seems like a challenge. And so, I guess when you're looking at different markets that have more, like you said, you mentioned Manhattan, right? That's naturally going to be protected. Whereas you look at some of the other coastal markets where maybe there isn't as much property value. How is that affecting your decisions today? It sounds like you guys are very proactive in terms of considering these things, whereas maybe some aren't as proactive about this. So where do you see that in your decision making today and then where does that go from here?

Elena Alschuler (27:05) Yeah, so I think that's kind of the next frontier for us. So, we talked about when you identify an asset's higher risk, you have to dig in on the physical condition of that asset. And the other thing you have to really look at is what's going on in the market and the infrastructure, because if you have a perfectly hardened asset, but there's no electricity and no one can get to it. Tenants are still not going to be paying rent. So, you have to think about that market level infrastructure question as well.

Elena Alschuler (27:32) We kind of have a theory that when there is really high concentration of real estate value, like in lower Manhattan or the Boston Waterfront, it's hard to imagine that they wouldn't take action to protect those assets. But it is still a little bit of a subjective decision of like, okay, are they going to have the political will to get the projects approved and like where's the money coming. Is that going to be all real estate taxes paying for that? I think when we did the analysis in Europe the Netherlands comes up as how the Netherlands is going to get totally wiped out. And I think everyone who's in that market would debate you hotly on that because they have so much plans in place to build infrastructure to protect the real estate there. So, I think that's again, where you have to really kind of make your own call about what you think's going to happen in that market.

Adam Hooper (28:27) Yeah, it's a lot of you have to have a crystal ball a little bit, right? And just kind of make the best with the data that you can have. And again, I think that's what's so interesting about the report, as you kind of think about bringing that back to Real estate managers that maybe aren't as proactive, they aren't as in tune with this. What are some of the steps that they might be able to take to start getting better educated about these climate risks and some of the analytics that maybe you're looking at or could be available for managers to start considering this in their investment decisions?

Elena Alschuler (28:55) Yeah. So, I think just get started. There's a little bit of this, it's so complex. Let's just not even do it but it is a real risk climate.

Adam Hooper (29:05)  It's a now risk. Right. It's not, it's not a 30-year risk. It's like, it's now.

Elena Alschuler (29:10) Yeah, exactly. Yeah. And physical climate events are already happening today, as we recently saw in Florida. As we've seen on the New York, New Jersey coast recently. so, you have to consider it. None of these providers are perfect, but they're all pretty good and they're all way better than nothing. So, it really is a matter of just get started. Take, start taking a look at the data, start getting familiar with it. And I think one of the things the report does a good job of, is the last couple pages of the report summarize some questions to ask to make sure. You understand the approach of your provider. So, whoever you use, there's like, sort of five questions in terms of, what are the scenarios they're using? What hazards are they including? Do they include baseline risk? Do they include plan, market level, infrastructure? Things like that where you can just kind of get a handle on what you're looking at and really seeing it more as a flag. It's not going to give you the perfect accuracy crystal ball. But it's going to highlight some physical locations and markets. You need to look in this area for this kind of risk. And start paying attention to it there.

Adam Hooper (30:29) So that sounds like a great place to start. Go to the, show notes and download the report. Thank you, Elena. Now we're going to hear from Lindsay Brooker, Vice President of ULI’s Urban Resilience Program. Eli's Urban Resilience program is focused on how buildings, cities, and communities can be more resilient to the impacts of climate change and other environmental vulnerabilities. In this interview, Lindsay shares insights from her panel at the fall meeting called Demystifying Climate Preparedness: How to Prepare Our Buildings and Cities to Weather Climate Change. Nice pun. Here's our conversation with Lindsay Ruger. Well, Lindsay, thank you so much for spending some time with us here at the Fall Conference. Why don't you tell us a little bit about the work that you do with ULI?

Lindsay Brugger (31:13) Sure. Happy to, and thanks for having me. So, I am Vice President of ULI Urban Resilience Program, and that program helps our buildings, our communities, and our cities be better prepared for the impacts of climate change. So that is, of course, catastrophic events. Wildfires, hurricanes, but also slower moving, more stealth disasters like drought and warming temperatures. Something I want to emphasize here is that a central goal of our program is not just ensuring that efforts to enhance resilience, reduce vulnerability, that's of course a good thing. But we also want to strengthen cities overall and that means enhancing environmental performance, economic opportunity, and social equity.

Adam Hooper (31:58) And so resilience isn't necessarily just about the physical properties itself. There's, more of a fabric of resilience, whether it's at the community level, state level, so it goes beyond just the resilience that we think of in like a material property perspective.

Lindsay Brugger (32:15) Well, and I think it speaks to the underlying opportunity of resilience, right? We always think of it as just risk reduction, which it is. It's critically important to reduce that risk, but reducing risk is only beneficial if that disaster actually occurs, and where we begin to layer in these other opportunities that suddenly makes resilience beneficial 365 days a year.

Adam Hooper (32:36) So tell us about the panel that you were on, demystifying climate preparedness, how to prepare buildings and cities to weather climate change. Who was on that panel? What did you guys talk about?

Lindsay Brugger (32:46) That was a fantastic panel. I was so thrilled to be asked to moderate that panel by Gensler, who organized it. They had a great lineup. We had speakers from Gensler and from Arab, as well as from Scansca, looking at the full spectrum of Disaster Preparedness and resilience and how our buildings and communities, better prepare. And that looks at the economy equity, the overall city experience, right? it's not just where we are, it's how we live in our spaces as well as the environment and how those themes cross-cut to create those multiple benefits.

Adam Hooper (33:22)  And so we're here in Dallas, recording this at the fall meeting. Texas has seen a ton of growth, Right. And has its share of issues with some climate change, circumstances that are happening. So, what conversations are you having here, at the fall meeting, just in general to come up with some solutions for some of these challenges at the local environment here he's facing, but broadly in other locations as well.

Lindsay Brugger (33:51) Yeah, absolutely. So, two of the main ones we've been speaking about today are drought and wildfire. Those are interrelated hazards. They're certainly not the only hazards that Dallas face, but given we're only here for a week, we decided to focus in a little you about wildfires.

Adam Hooper (34:05) I'm curious to hear.

Lindsay Brugger (34:08) Yeah, absolutely. Well, believe it or not, when we look at the highest wildfire risk in the country, Texas is second only to California. So, it's important that we talk about it here and we did that at the Building Healthy Places Forum here as part of our fall meeting, we did a deep dive into the health of our forests, how that contributes to wildfire risk and how we can better manage our natural resources to reduce. And maximize the benefits of our natural systems, which has a wonderful co-benefit of also improving value. The value can be improved for example, in Flagstaff, Arizona, in our fire break report, we found that home buyers were willing to pay more for homes that were near, proactively managed for us.

Adam Hooper (34:53) And now again, I wouldn't intuitively think that Texas is a high wildfire likelihood state. Are there surprises or other interesting areas that maybe you wouldn't intuitively think are a climate risk for certain areas. What have you found in some of the research?

Lindsay Brugger (35:11) Yeah, so we have a report called Fire Break Wildfire Strategies for Resilience. I'll give you that for the show notes. But when you look in that report, there's a page that shows a map of the United States. There are other surprise areas. Florida, for example, is a high wildfire risk state, but they have also been proactive in managing their forest and reducing that risk.

Adam Hooper (35:33) Interesting. And so how I think, again, one of the common themes that we're discussing here is it seems. There's a very long-term theme we look at how we address some of these things, but it's a now issue, right? So, what are some of the more proactive steps people can be taking today, whether that's conversations like this, getting more educated and more aware of some of these challenges. What are some of the more effective now solutions that people can be exploring?

Lindsay Brugger (36:00) Yeah, that's a great question climate change is now, it's not a future issue. I mentioned drought as one of the other things we've been talking about while we're here in Texas, and that's an easy one to begin to address because one of the most cost-effective ways to address. Is simply to conserve water. And we're already seeing that consumers have an increasing preference for water efficient fixtures and appliances as well as buildings and landscapes.

Adam Hooper (36:26) And we had Elena from LaSalle yesterday come on and talk as well about her panel and the report that LaSalle co-sponsored with ULI. Tell us a little bit about your perspective, insights from that report. Challenges that we're seeing and how real estate professionals, owners, operators, developers, even users of space, can start thinking about some of these different impacts.

Lindsay Brugger (36:50) Yeah. At the end of the day, good data leads to better decision making. And that's a really simple statement, but we can't price climate risk, we can't mitigate climate risk if we don't first understand our level of risk. And unfortunately, there isn't a lot of transparency out there when it comes to some of the climate risk assessment analytic software that we have. Everyone does things just a little bit differently. And that was really the focus of the report that we did with LaSalle. There's a study mentioned in the report of how we compare three different providers, so climate risk software providers with a slew of different addresses and for every address, each provider had a different answer. Which is so frustrating. You can't make a decision when there's no consistency, and especially with such a wide variation. One thing would be a low risk, another thing would be a very high risk. It's not even close. So, the report began to examine why this variation is occurring.

Lindsay Brugger (37:47) For example, there could be differences in the emission scenario that the software provider uses, right. Are we optimistic? Maybe it's just a 4.5 rcp. Maybe we're a little less optimistic. And it's RCP 8.5. So, RCPs are just, a mission scenario, it's representative concentration pathway. It's a scientific term, really everyone can just think of it as either a low emission scenario or a high emission scenario. And that's just one example of one of the things that can be different about these providers. They might also have different hazards that they, consider They might have different timeframes, right? Climate risk in five years is going to look a lot different than climate risk in 20 years. So that, again, can contribute to this variation. But what I think is really helpful about the report is they offered a framework, right? How can we begin to navigate what we have today? Because yes, our goal is to add some transparency and some standardization. We have to act now, we have to decide what we're going to do, given the fact that climate risk is not a future problem. And so, some of the steps that we offered is to have you think about whether or not your provider meets your strategic objectives. Right? Are you trying to report to sfdr? tcfd? Are you considering which hazards are most important to your portfolio?

Lindsay Brugger (39:13) You might also think about those RCPs, the timelines of emissions and what we. Is it going to be most strategic to the firm that's needing the input from the climate risk provider? And then the other piece that I'm sure Elena touched on is value at risk. And value at risk is, is touchy. We don't have a true definition for what value at risk or climate value at risk is everyone has different inputs. And we need to standardize those inputs so that we can truly make those comparisons.

Adam Hooper (39:44) And so another part of the conversation that I've heard multiple times here at the meeting is around insurance coverage. Obviously very difficult to forecast how that's going to play into these decisions, but that's a huge part of how to protect and maybe not necessarily from a physical resiliency perspective, but from a capital resiliency perspective. Insurance plays a pretty big piece of that. So, what are you seeing from the perspective of either the insurers, if you have any insights there, or as owners, how they're trying to mitigate against these unknowns and insurance or any interesting innovations in that area of the market.

Lindsay Brugger (40:19) Sure. Yeah. Insurance is a challenge. Insurance from a risk signaling perspective is only a one-year timeframe. They're not looking five or 10 years out and that doesn't always in line with a hold period. So, it is an indicator, but it can't be your only indicator. But our insurers are also recognizing that it's expensive to continue to have to pay out claims after these major disasters that are increasing in frequency and intensity. And so, they are trying to incentivize in their own way, building in a more resilient manner. A couple examples. The Insurance Institute for Business and Home Safety for years has had a fortified program. It's for single family homes, commercial businesses, and now multi-family as well. That can actually be legislated at the state level so that insurers are required to give discounts for the buildings that meet these above code standards. Other insurers like FM Global have recently announced a 5% premium reduction to incentivize resilient design.

Lindsay Brugger (41:24) California is another great example that just announced a new policy that is mandating insurance discounts for specific measures that reduce wildfire risk. So, we're starting to see some moment which I think is really exciting and I would love to see the insurance begin to offer longer policies, longer term policies that might give our developers a little more assurance and further push them to design with resilience in mind.

Adam Hooper (41:52) Yeah. You think because there seems like there's a longer-term view when you're taking resilience into account. Right. And that's a longer-term payback period that you're looking at. So, for your insurance to reset every year, those incentives aren't really aligned. Necessarily. So, I think that is interesting. If there is. Again, you're always looking at is it a character stick that's going to make the action happen? It sounds like there's maybe some regulatory sticks and maybe some private market carrots that will help get that along. So that is interesting to see if there will be more of an alignment of time horizon with those, because a lot of these measures are probably from the real estate owner's perspective much longer time horizon than a one-year return or one year decision. Right.

Lindsay Brugger (42:34) Well, and when you look at the protection that insurance is meant to provide, if that insurance policy is also encouraging above code design, then that does more than just financial protection. because insurers will. Protect your initial investment, it won't protect your return. Right? It's there to help you recover from damage. And that's not going to help your building value if it plummets.

Adam Hooper (42:56)  Right and then finally, switching gears here a little bit the work that you've done with First Street Foundation. That, ULI helped them build or research on the data for their risk factor pro tools. So, tell us a little bit about the work that you've done there.

Lindsay Brugger (43:11) Yeah, so that was an interesting collaboration for us. ULI really sees a need to bring together climate risk analytic software industry partners and the real estate industry to help to refine the tools that are available and just make the outputs more relevant and more actionable for real estate. Real estate professionals are not typically climate scientists. and climate scientists don't often understand the business of real estate. So, it was a nice opportunity to bring these two sides together and hopefully make them both stronger. The collaboration with First Street was, I would say a first foray for ULI into working more deeply with climate risk software developers. We were able to hold a series of focus groups where ULI members informed essentially the user interface. So, First Street Foundation did all the backend data, climate risk analytic stuff, and we helped them better communicate that to the real estate industry and they integrated a lot of ULI member feedback. They had the opportunity to analyze past, present, and future risk at the asset and at the market scale. They're estimating building specific damage and downtime. You can see how that could be helpful to real estate. And then there's interactive hazard layers for flood and wildfire and extreme heat, as well as individual asset analysis and aggregate portfolio reviews. So, we really enjoyed that opportunity to make a tool better, and we would love to continue to do work like that and what I think our ULI members will benefit from more broadly is the discount that First Street Foundation is offering to ULI members in appreciation for our help. They are offering five free report downloads to all ULI members.

Adam Hooper (44:53) Perfect. And again, we'll have links in the show notes for all these resources. So, I guess along that line  of creating a standardized language and methodologies against all these different reports and different service providers. Where does ULI see their role in that? And then as owners and practitioners, what's their role in that?

Lindsay Brugger (45:17) I think ULI has a strength in being a convener, right? We're a big tent organization. We have everyone for architects, engineers, and lawyers, all the way up through developers, investors, and, and city officials. And I would love to see us bring together the real estate industry and the climate risk analytics software industry to talk about the emerging standards and how we can be more transparent in what we're doing so that we have better outcomes. Because each firm is going to have their own needs. They're unique, right? It depends on what you're investing in, what your time horizons are, what your risk tolerance is. And so, they might be best served by tool A or tool B or tool C, or maybe even a combination of tools. But the more that we refine each of these tools and make them easier to use and more applicable, the greater uptake, we’ll see. Which ultimately translates to reducing risk, preserving value, and just creating a more resilient future.

Adam Hooper Perfect. Well, I think that's a great spot to wrap it up. Thank you, Lindsey, so much for spending your time with us. Why don't you tell the listeners how they can learn more about what you're up to at ULI?

Lindsay Brugger (46:18) Thank you. It's been a pleasure. You can learn more about the Urban Resilience Program at uli.org/resilience  

Adam Hooper (46:25) Thank you, Lindsay. You can learn more about Lindsay and ULI's upcoming Resilience Summit in Toronto by checking the show notes. This concludes our first episode from the fall meeting. Thank you again to Urban Land Institute for inviting us to bring our studio to the fall meeting and for allowing us to bring our listeners these insights and highlights. To learn more about the Urban Land Institute, head to uli.org. Stay tuned for the next episode in the series.

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