How Climate Risk Financial Modeling Will Change Real Estate Investing
A Q&A with Toni Moss and Matthew Eby
In April of 2024, REI INK was an official publication of the groundbreaking AmeriCatalyst conference, GOING TO EXTREMES: The Extreme Climate, Housing and Finance Leadership Summit. The event brought together the primary constituents in US housing to discuss risks posed by climate change to the housing market. Recent hurricanes Helene and Milton have emphasized the need for astute real estate investors to factor the impact of extreme weather on their investments. These multibillion dollar loss events have brought the vital conversation of insurance, climate migration and declining property values to the forefront.
This article features a conversation between Toni Moss, founder and CEO of AmeriCatalyst LLC and Matthew Eby, Founder and CEO of First Street, about the emerging field of climate risk financial modeling (CRFM) and how it will fundamentally change the way real estate investors evaluate the impact of climate change on their investment portfolios.
Toni: The historic precedent and ultimate impact of attributing climate risk scores to individual homes cannot be understated. A lot can be read about the science behind the scoring, but I’m interested in knowing about your original idea to do this.
Matthew: During my time at The Weather Channel, I observed the difficulty of making climate change real in people’s everyday lives. The conversation often centered around melting ice caps and surface temperature rise rather than its direct impact on individuals and their families. This led to the question: How can we make climate change tangible?
For most people, their home is their largest investment. By linking climate change impacts to this major financial and personal asset, we were able make the issue more real and urgent. Thus, eight years ago, we established First Street with the mission of connecting climate change to financial risk.
We began by assembling the leading climate scientists in order to develop a set of comprehensive physical climate risk models focused on flood, wildfire, hurricane wind, air quality, and extreme heat. Next, through a collaboration with Arup, a leading environmental engineering firm, we were able to translate climate risk assessments to individual properties in a more tangible way, enabling us to quantify damage due to exposure. We now have property-level climate risk and damage assessments for every property in the US and are expanding internationally.
First Street is the leading provider of climate risk financial modeling (CRFM) to governments and major financial institutions, and our climate risk data is featured on all the major real estate platforms: Realtor.com, Zillow, homes.com and Redfin. As a result, nearly every home on the market in the U.S. now includes our climate risk data. We consider this data crucial for everyone from homebuyers to real estate investors to large banks because it allows them all to make climate-informed real estate decisions.
Toni: Now that First Street is on all three major real estate platforms (Redfin, Zillow, Realtor.com), what impact do you foresee these scores having on the housing market?
Matthew: The integration of climate risk scores into the major real estate listing sites marks a pivotal shift in the housing market, elevating climate awareness to the forefront of real estate decision-making. By offering visible and accessible climate risk data to homebuyers and investors, it empowers them to make informed decisions on property purchases, significantly impacting buyer behavior. Prospective homeowners may now weigh climate-related threats against traditional factors such as price, location, and amenities, leading to a potential reshaping of geographic demand patterns.
We have already seen areas identified as high-risk for floods, wildfires, or other climate-related events experience a decrease in property values, while regions deemed as “safer” from climate risk see an appreciation in value as demand increases.
Our own research has found that by simply raising awareness around climate risk, there is an associated 3-4% property value decrease for at-risk properties versus those not at risk. Additionally, we have seen systematic changes in search history on sites where this data has been made available, with high risk property searches being followed by persistently lower risk searches.
Moreover, as lenders incorporate climate risk scores into their risk assessments, this could lead to changes in mortgage lending practices. Properties in high-risk areas might face higher insurance premiums or stricter lending criteria, complicating the acquisition process. On a broader scale, the housing market will likely witness a recalibration with increased pressure for sustainable development and infrastructure improvements in vulnerable areas. This shift reflects a growing acknowledgment of climate change’s inevitability, urging all stakeholders—from government officials to developers to consider climate in their investing practices.
Toni: Which poses a more significant risk from climate change: physical damage to structures or the secondary economic impacts such as insurance costs, property value, local GDP, and climate-related migration?
Matthew: When evaluating the risks associated with climate change, real estate investors must consider both direct physical damage to structures and the secondary economic impacts that can arise more indirectly. While physical damage — such as property destruction due to flooding, hurricanes, wildfires, or other extreme weather events — poses an immediate and tangible threat, the secondary economic effects can be equally, if not more significant over the long term.
Physical damage to properties can result in substantial repair costs and loss of rental income during downtime. Properties in high-risk areas face increased insurance premiums or even become uninsurable, affecting their overall profitability and marketability of both the property and the local community. Moreover, repeated exposure to climate-related hazards can lead to depreciation of property values, making it difficult to sell or rent them at competitive prices.
Most recently, we have seen the first evidence of climate related migration in the US. Specifically, we are not seeing this as large macro migration trends of people fleeing risky areas, like Florida, Louisiana, and California, but instead are using property level climate risk information to identify properties within their desired residential locations.
These decisions are being made by homebuyers armed with high-resolution and high-precision climate-risk information and, over time, are going to reshape the landscape of desirability in some cities. In fact, just over the last two decades, we’ve already seen 3.2 million moves driven by climate risk from areas that are seeing an overall population loss.
In response, real estate investors must conduct comprehensive risk assessments that include climate projections and consider potential economic shifts. Diversifying portfolios to include properties in regions less susceptible to climate risks can mitigate exposure.
Ultimately, while physical damage is a direct and immediate concern, secondary economic impacts can have far-reaching and lasting effects on real estate investments. By understanding and preparing for both dimensions of risk, investors can better safeguard their assets and capitalize on opportunities in a changing climate landscape.
Toni: First Street data is used by the federal government and over half of the $100+ Billion banks, but how can your climate risk financial modeling be used by real estate investors who do not have big teams of people to implement the data?
Matthew: Our goal is to deliver climate risk financial modeling across all sectors of the real estate market. So we have introduced the First Street Enterprise Suite, a SaaS solution that enables customers, regardless of their size, to upload their portfolios and access the following essential components for climate risk financial modeling.
» Exposure // Assess your risk for all climate hazards, both holistically for your entire portfolio and at the property-specific level.
» Climate Scenario Analysis // Evaluate damage and downtime by quantifying the risk to your portfolio, understanding both direct damage and the financial impact of downtime and lost revenue.
» Macroeconomic Impacts // Analyze the effects of rising insurance rates and climate migration on portfolio and property values.
These pillars of climate risk financial modeling equip real estate investors to articulate their risks, implement strategic processes, and make informed decisions that enhance business value. This approach streamlines the investment committee process and empowers compelling climate risk narratives.
