Geolocation plays key role in assessment of climate risk

As pressures to address climate change mount from both regulators and scientists, data analytics will play a vital role in helping the real estate and finance industries protect themselves from associated risks.

Geolocation technology, which can determine a location based on electronic positioning data transmitted through smartphones or other digital devices, is taking on greater importance in addressing effects extreme climate might have on businesses. With the capability to measure data on a granular level, geolocation analysis holds promise as a resource for those involved in commercial and home finance. But as with the adoption of other technologies that might be beneficial in the long run, work remains in building widespread awareness of what it can do in order to encourage broader use of it.

"It's like you're doing a boots-on-the-ground site visit, but you're doing it with data," said Sara Maffey, head of corporate strategy at Local Logic. Headquartered in Montreal and founded by urban planners, the company helps quantify data ranging from climate risk to restaurant options and noise levels for real estate-related businesses in North America. 

Tools driven by commercial demand
Helping to drive much of the current demand for climate-related geolocation data is the commercial real estate investment community, driven to make better-informed decisions — whether by choice or mandated — out of environmental, social and governance concerns. "We're often augmenting the acquisition stage," Maffey said. 

A Securities and Exchange Commission proposal issued last year that would eventually require publicly traded enterprises to disclose risks from extreme weather also brought climate assessment to the fore. While exact rules have yet to be introduced, the SEC announcement hinted at stringent requirements in the future and provided an entry point for many businesses, including those involved in housing, to think about climate plans. 

"As we see multifamily investors and single-family rental investors really trying to take more of an approach to ESG, climate risk is one of the first ways that they're able to really wrap their arms around that," Maffey said. 

"For the equity investors, it's become [part of] best practices quickly. I'd say the impetus a few years ago was ESG requirements within each fund," said Cal Inman, CEO of climate data provider ClimateCheck. 

The San Francisco-based company, which specializes in environmental risk data as it relates to real estate, has origins within the commercial market, the sector Inman came from before helping start the company.

"I saw a real need for the data as an end user," he said, noting that commercial real estate investors can look at climate data to help inform an overall investment thesis. "Data wasn't accessible, and it wasn't easy to understand because I don't have a background in the sciences." 

For real estate investors who cannot physically inspect a property outside their home base, geolocation data may help drive decision making, filling out a picture that can determine the suitability of a potential purchase when there's insufficient resources to visit a site or conduct a risk report.

"If you're not familiar with that market — and a lot of the hot markets are where climate risk is pretty pronounced, whether it's heat or fire or flood or storm — I think it makes having a reliable data source like that even more critical to making those decisions because you have to move quickly," Maffey said. 

With a team of data specialists and scientific advisors, ClimateCheck is among the companies that gather information from public sources to assess risk of extreme heat, wildfire or flooding. To determine flood risk, for instance, researchers overlay rainfall data over topographic maps to ascertain where water falls and floods might occur in geographic parcels the size of a city block or smaller. 

"All the inputs are publicly available. But how do you synthesize it, and then, most importantly, search it quickly, and then present metrics or information that's really easy to understand and conveys these concepts of risk?" Inman said.

Residential real estate's slow adoption
While the application of climate-related data has gained a foothold within commercial and investor real estate circles, businesses dealing in residential transactions have been much slower to embrace it. The key players involved in residential sales and lending are more concerned with the most immediate issues, such as local market pressures, price trends, supply and demand and the borrower's risk profile.

But when it comes to the effect of climate, "that's a risk factor that I don't know a lot of lenders have put into their overall equations," said Rick Sharga, executive vice president of market intelligence at real estate data provider Attom. 

The approach toward climate dangers has typically been reactive, usually following major disasters, rather than prescriptive. In 2005, for instance, insurers raised rates along the Gulf Coast following Hurricanes Katrina and Rita to the extent that monthly insurance costs became more expensive than mortgage payments in many cases, Sharga said.

But climate disasters are a factor businesses are facing more frequently, especially in higher-risk states and regions. Continued impacts will hit the property insurance industry first, before moving down the line, requiring other real-estate related companies to adjust their models and strategies in response. 

Insurance premiums nationwide increased by an average of 12.1% from mid 2021 to mid 2022, in part due to the effects of more severe climate impacts, a recent report from insurance broker Policygenius found. In some states where natural disasters have occured with more frequency, insurance costs surged even higher, including 18.5% in Arkansas, 18.1% in Washington and 17.5% in Colorado. 

"I think that's the reality that our industry — and I'm using that term as broadly as possible — is going to be facing in the coming years," Sharga said.

"If you build a property, will it be insurable? Will the insurance costs be affordable? If you're a lender, should you be making loans in high-risk areas? And if you're a servicer, what's your protocol now for when that inevitable disaster strikes?" he said.

The less often discussed climate risks to housing
While much of the attention devoted to climate risk often centers on catastrophic events, real estate companies and lenders also cannot overlook the impact of "existential risk" posed by drought and heat, Inman said.

"People come to this more interested in fire and flooding with the notion that those are the most important factors," said Annie Preston, ClimateCheck's data and visualization lead. 

"I think extreme heat is very overlooked," she said, noting the building boom seen in high-risk areas subject to high temperatures. "It's also the deadliest hazard and has a lot of different infrastructure-related reasons that could really disrupt life in a lot of places."

Although climate assessment within residential sales and lending still may be in the early stages of adoption, Inman said he is noticing awareness growing, with an uptick in numbers reaching out for climate data. 

"All stakeholders are getting affected. The increased frequency of these events happening —  I think it's something we're all thinking about," he said.

"If you're a lender, part of your portfolio is on fire. Insurance companies, investors and homeowners — we're all experiencing it. And so, I think that, more than anything else, makes it top of mind."