Lenders, Insurers Stepping Up Pressure On Developers As Climate Crisis Looms

Communities across the world are pushing developers to build sustainably and governments are introducing new measures to demand it. Now, the pressure is building from those who pull the purse strings for developers to really prove they are trying to tread carefully on the environment.

“We're facing increased insurance premiums and we're facing increased risk from financial lenders,” Stantec Senior Principal Andrew Burnett said during a panel discussion at the National Association of Real Estate Editors conference in Miami this week. “Projects are starting to realize there is a financial demand and feasibility of getting a project to move forward to show how you're addressing a changing planet.”

In August, the United Nations' Intergovernmental Panel on Climate Change released a disturbing report that found the past five years have been the hottest on record since 1850, and the recent rate of sea level rise has nearly tripled compared with the years between 1901 and 1971.

In short, the report sounded the alarm on what it described as “code red for humanity” — though it stressed slashing global emissions could halt the damage. The behavior and choices of builders and developers will play a big role in bringing those emissions down, and they have a lot to lose, too.

In New York City, for example, about 37% of the buildings in Lower Manhattan are expected to be under threat from storm surges by 2050. Annual flooding in Miami-Dade County, Florida, is expected to double by 2050, and 61% more properties would be at risk from chronic flooding than are at risk today.

The climate crisis is no longer something that developers can afford to ignore.

“The lenders are asking, and insurance providers are asking, ‘What are you doing to address a more resilient built environment?’” Burnett said. “Financial pressure may be one that's coming in as one, and I think our clients are starting to realize, and they're asking us, 'What can I do to show my financial vendor I'd partner that I'm addressing it appropriately?'”

For Tony Cho, the founder of Metro 1, a real estate development firm focused on developing sustainable cities, one of his “life’s missions” is to demonstrate that meeting environmental, social and governance outcomes can have outsized returns. The will to fund responsible development is there, he said, but there needs to be the right kinds of infrastructure to make it work.

“There needs to be a new innovative model that funds housing that is environmentally and socially forward ... we need to prototype them, and that's what I am doing using opportunity zones, Covid funds, brownfields, green infrastructure dollars,” he said, adding that the next generation of successful projects needs to avoid negative outcomes like gentrification.

“Family offices and institutions, they all want to have an ESG strategy," Cho said. "People are not interested in investing in sin businesses as much as they were before. They want to be part of the solution, not the problem.”

Across the country, there are new incentives and regulations being rolled out to force real estate owners and builders to improve their buildings.

In New York City, starting in 2024, landlords could face large fines if they don’t reduce their buildings' emissions. Local Law 97 establishes caps on greenhouse gas emissions for buildings 25K SF and larger citywide; it could cost building owners up to $20B collectively, according to an analysis by The Urban Green Council. The regulations have been met with staunch opposition from some landlords, but many others say the regulations are forcing the industry to discuss and strategize for climate change in a more concrete way.

Galina Tachieva, the managing partner at urban planning firm DPZ CoDesign, said she is optimistic about the efforts that have gone into adapting to sea level rise.

“I think that we started a long time ago to work on these climate change issues and sea level rise. I mean, there's so many initiatives currently available,” she said. “The people who are here look at Miami as the next tech hub and not a sinking city.”

But Cho countered that it is not the time to feel optimistic just yet.

“There is a beginning of awareness around the need and the urgency of the situation, but I certainly don't think the investment matches the severity of the issues,” he said. “I do think that we have the opportunity to reinvent ourselves, but I think more investment needs to be made into the built environment into both the strategy of mitigation and adaptation.”