On the News: Will Some CRE Markets Be Too Hot to Handle?

Therese Fitzgerald

Even though heat is responsible for most weather-related deaths, according to the National Weather Service, until recently it was often listed among a laundry list of other climate risks. “The accelerating physical consequences of a changing climate are becoming more and more pronounced as communities face storms, floods, fires, extreme heat and other risks,” McKinsey analysts wrote in February 2022, for example.

However, this summer—likely the hottest on record—heat is getting its own bright spotlight, and Phoenix is the center of attention. The city ended 31-plus days of 110-plus-degree temperatures on Monday, according to the Associated Press. That’s a first for any U.S. city.

Warmth, along with economic opportunity and reasonable housing prices, helped make Phoenix and other Sun Belt markets new urban darlings during and after the pandemic for residents and corporate tenants that want to escape more sprawling, more expensive metros. Phoenix is close to California, but the cost of living is lower, it is more business-friendly, and there are no earthquakes.

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While Phoenix and other Sun Belt markets have been attracting new residents and businesses, though, they’ve also acquired big-city issues that include intensified traffic, inflation, and heat. More concrete, more cars and less shade make an already hot climate even hotter for more hours of the day, particularly for lower-income residents. While the earth has warmed by 2 degrees since 1880, according to the National Oceanic Atmospheric Administration, the “heat island effect” can add up to 20 degrees to the mid-afternoon temperature, and that added heat does not dissipate at night.

In addition to being a health threat, heat waves and droughts are also a driver of utility expense, according to a report by Moody’s Analytics. Add to that higher insurance premiums and the cost of mitigation.

All that begs the question: Could the country’s most popular investment markets be among the most dangerous from a climate perspective?

That duality was present in this year’s Emerging Trends, which forecast continued enthusiasm for Sun Belt markets, albeit at a slower pace, and that has played out. But it also predicted that investors and residents may begin to move away from these very markets and others if high exposure to climate change cannot be managed or reduced, despite the best efforts of developers and municipal governments. We haven’t seen that yet, but it is conceivable, given the growing intensity of climate change, and the decision by some insurers to hike rates, limit coverage, or exit markets completely in Florida and California.

View of the Phoenix skyline from the desert/Image via EPA.gov

The tendency for residents to run toward danger is curious but not new. Brookings Institute Senior Fellow Jenny Shuetz and Senior Researcher Julia Gill posted commentary last week noting that over the past 20 years, the fastest-growing counties and neighborhoods, such as suburban Phoenix and coastal Florida, are also the most prone to climate risk. The experts go on to discuss various “levers” that government and the financial community can pull to make housing and infrastructure more resilient, increase risk- disclosure requirements, and discourage private development in the riskiest places.

LISTEN ALSO: Can CRE Make Cities Cooler?

It’s not surprising that lower cost of living, fewer taxes, and enhanced wellness—the ability to be outside year-round has physical and mental health benefits—have thus far won out over climate concerns for residents and employers, and investors have happily followed. But will stakeholders think differently as temperatures and other threats rise?

Granted, extreme heat is a national issue. This summer, for example, heat waves helped push noxious wildfire smoke down to New York City from Canada, and contributed to the worst flooding that seemingly safe Vermont has ever seen.

Heat has also been high on President Biden’s national climate agenda since he came to office, and last week he announced a number of heat-related measures, including new protections for outdoor workers, improved weather forecasting and notification, and enhanced water storage in drought-prone areas, such as California, Colorado and Washington.

But they don’t call the Sun Belt the Sun Belt for nothing!

Therese Fitzgerald is an executive editor for CPE and host of the Sustainability Street podcast.