These start-ups are trying to predict how climate change will affect real estate

Investors are turning to a host of new high-tech startups that can measure the risks posed by climate change to real estate – from an hour to decades into the future.

And these companies see corporations and big cities as customers. One of them is Jupiter.

“We’re essentially modeling physically what’s happening to the atmosphere and water or flames at a very specific level of detail and often at the asset level, which is currently only possible made it possible because computers have become very powerful and relatively cheap,” said Rich Sorkin, CEO of Jupiter.

Launched less than three years ago, the Silicon Valley-based company has more than $40 million in funding from companies including Energize Ventures, Ignition Partners and Data Collective. It also received grants from the National Science Foundation and NASA for its work in cloud computing and satellite observations.

The company’s primary goal is to incorporate climate impact data for flood, fire, heat, drought, cold, wind and hail events into risk modeling for real estate assets. Its customers include the coastal cities of New York and Miami.

“We’re seeing a significant expansion of large corporations coming to us, unsolicited and saying, ‘We need to understand the risk to this office complex or the risk to this office complex. with this hotel, or the risk to this power plant or this refinery, or sorkin said.

He compares this new focus on climate risk to when cyber risks become a major threat.

“If you were a large corporation 10 years ago and someone said ‘cyber risk’, chances are a lot of people would say, ‘What is that?’ Now, every major entity on the planet, corporate, financial services, government, they are managing cyber risk. It’s just a fundamental part of their business,” Sorkin said. “And the same will be true of the risk posed by extreme weather, due to climate change that has already happened and will inevitably happen over the next few years.”

At Jupiter’s offices in Silicon Valley, New York and Boulder, Colorado, about 50 employees, including a Nobel laureate and former head of Google’s satellite data systems, analyze specific properties. using thousands of predicted data points. They then give the client a risk score for 50 years from now.

Last year, when Typhoon Mangkhut hit Hong Kong last summer and Hurricane Florence simultaneously hit Wilmington, North Carolina, Mary Ludgin watched it all from a tower in Chicago.

Head of global investment research at Heitman, a major real estate investment firm, Ludgin measures risk across the company’s approximately $42 billion worth of real estate assets across four continents. Climate risk is the new frontier.

“We see that as an unexplored risk that we need to try to quantify,” Ludgin said.

Heitman collaborated with the Urban Land Institute on a groundbreaking study on climate risk and real estate decision-making. It concluded that overall real estate markets “are far from understanding climate risks enough to value them as they are now … but those who are prepared have the potential to do better.”

“And we want to hone our skills and abilities to cope with the risks of sea level rise, high tides, wildfires, access to fresh water, heat stress,” says Ludgin.

So Heitman turned to Four Twenty Seven Inc., a climate data startup based in Berkeley, California. Its name is a reference to California’s previous 2020 emissions target, 427 million tons of carbon. It was established in October 2012, shortly after Hurricane Sandy.

In the summer of this year, the company was acquired by Moody’s, a major rating agency. Like Jupiter, it tracks risks including hurricanes, heatwaves, extreme rainfall, and sea level rise. To date Four Twenty Seven has tracked climate impacts on at least 2,000 companies and 320 REITs in 196 countries.

Myriam Durand, global head of ratings at Moody’s Investors Service, said: “Four Twenty Seven has built a strong platform for quantifying climate-related exposures and creating risk metrics. actionable, essential to understanding and informing climate resilience measures and risks”. release. “Moody’s is committed to providing transparent, global standards for environmental risk assessment, and the acquisition of Four Twenty Seven advances our goal of integrating climate analysis into our services.”

This may just be the first of many moves towards factoring climate risk into big businesses and big real estate.

“Markets are just beginning to recognize the need to do this kind of risk assessment,” said Frank Freitas, chief development officer at Four Twenty Seven. “For real estate, what people want to know beyond scores and relative exposure, is what the world will look like at this location in 10 years, 20 years, 30 years. I’ll have five days. another flood or 10 more days of heat? What is the physical, observable result?”

Freitas is quick to add that they do not offer investment advice.

“But we show them what the forecasts look like at times and give them the opportunity to design towards that,” he added.

Both Four Twenty Seven and Jupiter go beyond what insurers forecast, because, unlike insurers, they don’t measure risk in terms of the past, but the future.

“Insurance is basically a one-year term policy, at the end of which the insurance company will say, ‘Oh, we’ll continue to cover you, but this is a new cost’ or, ‘ Sorry, insurance is no longer available as long as Ludgin said, “What we’ve learned is that risk isn’t priced into the underwriting that investors do as they think an investment in Miami doesn’t matter. term. It is not reflected in the price. And our investors think that what they get when they hire us is the ability to hedge risks and opportunities. “

And the risk is not only in wind, rain, drought or fire. It’s also in the cost of protecting the property from all of them.

“What we added to the mix is ​​what happens if your insurance costs quadruple? What if your property taxes were quadrupled, or even more so, quadrupled? And does the investment still make sense under that scenario? ” said Ludgin.

The United States faces a cost of more than $400 billion over the next 20 years to protect coastal communities from sea level rise, according to a study by the Center for Analysis of Integrity and Resilience.

That includes the construction of 50,000 miles of coastal fences in 22 states. Two years ago, residents of Miami voted for a $400 million, self-taxing bond to protect their city from flooding.

“The past two and a half years have been really transformative in the way the business community in the United States, and for that matter around the world, is thinking about these issues,” said Jupiter’s Mr. Sorkin.

While there are few companies in the climate risk forecasting sector, the potential for growth is huge. And while no risk assessment model is perfect, the technology is only getting stronger and cheaper.

“Do we know whether or not there will be tipping points in the climate that produce an acceleration of some of the effects we’re modeling? We don’t, but I mean the rigor with which we are modeling. I apply beyond any uncertainty,” said Four Twenty Seven’s Freitas.