resilience

By Paul L. Jones, CPA, May 13, 2019

In his legal commentary posted on April 1, 2019, my colleague, Rick Jones, a partner with Dechert LLP, a leading law firm serving the Commercial Real Estate Debt Market, opened with “I’m finally writing about climate change… not because 97 out of 100 scientists are shouting at us incessantly about the need to do something, but because I am dead certain that there are real and fairly immediate risks associated with the public reaction to the perception or awareness (take your pick) of the climate change risk which will drive regulatory intrusion on both the state and federal level, will drive legislation and moreover, will inform market reaction to lenders, investors, developers and their properties because of their climate change posture or profile.”

The esteemed Mr. Jones continues: “Where do we start? We are already seeing some commercial real estate owners begin to adapt to regulatory change. Look at the fantastic engineering marvel which is the Hudson Yards, built 40 feet above sea level, with its storm management system and its fortress-like power system designed to survive a mega storm. That’s expensive. It was clearly purpose driven. We should ask what made them, a bunch of smart folks, put up the money. I guarantee it wasn’t frivolous. I would suggest to you that it’s a sign of things to come. More generally, we are also seeing more solar, more green building technology and more innovations in engineering and in general more willingness to pay real money to address environmental concerns.”

New York has a wet climate, and water – from hurricanes, flooding, storm surges and even blizzards – is one of its primary environmental challenges throughout the year. Of course, buildings in NYC also endure seismic activity, high heat loads in the summer, power outages, manmade disasters like those produced by terrorist attacks as well as high humidity and year-round precipitation.

On the Pacific coast, seismic considerations are a primary concern as well as danger from wildfires, flash floods, and drought.

For most of my career serving the real estate industry, I have primarily conducted due diligence and providing underwriting and financial feasibility analyses for buyers, investors, lenders and capital market participants.

We usually start with a checklist of due diligence and underwriting items which typically includes:

reviewing historical operating statements and related reports,
abstracting leases and tenant correspondence records,
getting a title abstract, checking the flood zone,
obtaining and reviewing a property condition assessment (PSA) and a Phase 1 environmental site assessment (ESA), and
evaluating all legal and contractual arrangements that may affect the income and expenses of the property.

But, if you are like most real estate investors, you have missed one item which affects all properties and portfolios: the risk resulting from climate change and sea level rise as well as man-made hazards: You still do not know how sustainable and resilient the income and future value from your investment is.

Beginning about five years ago, my clients started to ask questions regarding the potential effect of climate change and sea level rise on the sustainability and resiliency of the property.

It is important to note that the risk to real property assets – which are immovable by their nature – exists regardless of whether you believe humans have caused climate change, or not.

In fact, my client chose to divest of assets in Miami in order to buy assets in locales without the risk of sea level rise and our screening process involved an informal, yet substantive, assessment of the risk from climate change – no matter the location of the property.

In an article entitled “What does resilience mean for commercial real estate” by Ryan M. Colker published in the September/October issue of BOMA Magazine, he opens with the following observation:

“Around the world, the frequency, intensity and impacts of natural disasters are increasing. These events can significantly affect the social, economic and environmental functionality of communities. The ability of commercial buildings and the businesses they house to adequately prepare for such events and quickly return to full operations—a quality known as resilience—contributes significantly to a community’s ability to bounce back. In addition to the community-wide impacts, the state of individual buildings also can affect the long-term viability of the businesses that occupy those buildings.”

For a multi-family, commercial or industrial building, we at Emerald Skyline define building resilience as “the ability of the systems and structure to protect, maintain or restore the value of, functionality of, and income generated by a property after a damaging event or calamity – whether it is from a weather event or a man-made circumstance – within a pre-determined acceptable timeframe.

A widely-cited 2005 study by the Multi-hazard Mitigation Council (MMC) of the National Institute of Building Sciences “documented how every $1 spent on mitigation saves society an average of $4.

In a 2018 interim update report by the MMC found that costs and benefits of designing all new construction to exceed select provisions in the 2015 IBC and the IRC and the implementation of the 2015 International Wildland-Urban Interface Code (IWUIC) resulted in a national similar benefit of saving $4 in future losses for every $1 spent on additional, up-front construction costs.

In a report published last month (April 2019) by the Urban Land Institute (ULI) and underwritten by Heitman LLC (Heitman) entitled “Climate Risk and Real Estate Decision-making,” the authors note that:

“In 2017, the year Hurricanes Harvey and Maria hit the United States and storms battered northern and central Europe, insurers paid out a record $135 billion globally for damage caused by storms and natural disasters. This figure does not represent actual damages, which in the United States alone equaled $307 billion, according to National Oceanic and Atmospheric Administration estimates.”

In the Foreword, Ed Walter, Global CEO, ULI, and Maury Tognarelli, CEO, Heitman, highlight the need to address sustainability and resiliency:

“Failure to address and mitigate climate risks may result in increased exposure to loss as a result of assets suffering from reduced liquidity and lower income, which will negatively affect investment returns. At the same time, investors who arm themselves with more accurate data on the impact of climate risks could help differentiate themselves and benefit from investing in locations at the forefront of climate mitigation.”

And the industry – especially among institutional investors – is taking note. “Many leading investment managers and institutional investors are undertaking flood, resilience, and climate vulnerability scans of their portfolios. These mapping exercises seek to identify the impacts of physical climate risks on their properties, including sea-level rise, flooding, heavy rainfall, water stress, extreme heat, wildfire, and hurricanes. Potential impacts being considered range from physical access and business disruption for tenants to the effects that longer-term temperature increases or increased wear and tear on buildings could have on operating and capital expenditure requirements. The ultimate objective for the investment community is to understand how climate will affect asset liquidity and, as a result, returns, in terms of both income and capital growth.”

The results of the survey conducted in preparation of this report, the researchers found that industry participants continue to rely on insurance companies to cover potential losses from physical damage due to a natural disaster – but they astutely point out that insurance “does not protect investors from devaluation or a reduction in asset liquidity.” They categorize the climate risks either physical or transitional risks as follows:

“Physical risks are those capable of directly affecting buildings; they include extreme weather events, gradual sea-level rise, and changing weather patterns.

“Transition risks are those that result from a shift to a lower-carbon economy and using new, non-fossil-fuel sources of energy. These include regulatory changes, economic shifts, and the changing availability and price of resources.

“The location-specific physical threats posed by factors such as sea-level rise, hurricanes, wildfires and forest fires, heat stress, and water stress are among the most easily observable risks to real estate investment. They are a particular concern since many key markets for real estate investment are in areas exposed to the physical impacts of climate change.

These risks and their potential impact on real estate is summarized in the following table.

So far, according to the ULI report, “…most investment managers and investors for directly held assets currently use insurance as their primary means of protection against extreme weather and climate events.” However, “leading companies in the industry … are modifying existing decision-making and management processes to add climate and extreme weather-related factors to those being considered alongside other risks and opportunities.

The National Infrastructure Advisory Council (NIAC) in a 2009 repot characterized resilience as having four key features known as the “4-Rs”:

Robustness: the ability to maintain critical operations and functions in the face of crisis.
Resourcefulness: the ability to skillfully prepare for, respond to and manage a crisis or disruption as it unfolds.
Rapid recovery: the ability to return to and/or reconstitute normal operations as quickly and efficiently as possible after a disruption.
Redundancy, back-up resources to support the originals in case of failure that should also be considered when planning for resilience

From the Whole Building Design Guide, a program of the National Institute of Building Sciences (NIBS), understanding the relationship between Asset (Building) resilience and the community’s resilience requires an understanding of the distinctions and relationships between risk, resilience and sustainability as follows:

Risk is expressed as the relationship between a particular hazard or threat that may degrade, or worse, devastate, the building’s security, operations and functionality and the consequences that result from this degradation of performance.
Resilience is the ability of a building or asset to recover from, or adjust, easily to misfortune or change. The ability to prepare and plan for, absorb, recover from, or more successfully adapt to actual or potential adverse effects as reflected in the aforementioned Four Rs.
Sustainability of an asset is determined by its ability to meet the needs of the present while being able to maintain its functionality over time without not being harmful to the environment or depleting natural resources.

The following diagram created by Mohammed Ettouney and Sreenivas Alampalli in their books on Infrastructure Health in Civil Engineering, presented the relationship of threat, vulnerability and consequences to risk as follows:

Recognizing the need for sustainability and resiliency due diligence, Emerald Skyline Corporation has developed a Sustainability and Resiliency Assessment (SaRA Rating^©) Rating system to provide commercial real estate investors with a complete picture of the risk associated with a particular property or investment. The information not only helps investors and owners but also provides lenders, insurers and tenants with information relevant to their decisions.

SaRA Rating^© incorporates an assessment of the physical attributes of the property – including incorporation of information obtained from traditional due diligence procedures with additional procedures to determine the relative risk, resiliency and sustainability of the property over the investment horizon.

The physical review of the property is conducted in conjunction with the Phase I environmental site assessment and the property condition assessment and includes a review of the property’s resiliency features like hardened walls, raised electronic and network connections, secondary systems.

No building operates in a vacuum: Its resiliency, in particular, is directly connected to its location and is directly affected by the surrounding neighborhood, the community, and natural and man-made risks (hazards).

Based on a property-specific assessment including use of mapping services, our team of professionals evaluate a building’s resiliency and sustainability resulting in a rating from 1, not resilient or sustainable (High Risk) to a 5 (Highly Resilient). Our objective is to provide investors with the information they need to make prudent investment decisions that account for the physical, environmental and social risks to the cash flow stream and market value of the building.

At the conclusion of our procedures, we identify land and building improvements that would enhance a property’s resiliency and sustainability. The economics of each improvement or enhancement is assessed in a cost-benefit analysis.

We then evaluate the tradeoffs between performance of a building over its life-cycle and the cost of improving the building systems to ensure its sustainability and resiliency. Accordingly, we evaluate the total cost of ownership (TCO) by determining the capital cost of the property including any improvements plus the present value of the future expenses of operations, maintenance, utilities and the estimated cost to recover from a calamity.

Further, armed with the SaRA Rating^© and report, the stakeholders can incorporate current and prospective tenant/user demand for the space in the building given the cost of occupancy and resiliency as well as investor demand and potential pricing for the asset. A resilient and sustainable asset will combine low-cost operations due to sustainably-reduced energy and maintenance costs and managed insurance expenses while maximizing the net cash flow and long-term value of the property.

The objective of all due diligence – including and especially the assessment of all the risks of ownership – is to optimize the overall returns on the investment while quantifying and minimizing the risks and costs to achieve those goals – that is the purpose of Emerald Skyline’s Sustainability and Resiliency Assessment Rating^© system – your one-stop resource to measure and manage climate risk in the real estate industry.

For more information, contact Paul L. Jones, CPA, Phone: 786-468-9414; email: [email protected]

Projects like these, where resilience is central to their design and construction, are becoming more commonplace.

Written by: John Caulfield
View the original article here.

Perkins+Will has written the design controls for the redevelopment of a 28-acre surface parking lot in San Francisco into a mixed-use waterfront community called Mission Rock, which would have a mesa running through it to handle sea levels that are projected to rise as high as 66 inches by 2100, compared to 24 inches today. Courtesy Perkins+Will.

On July 28, the New Jersey Department of Environmental Protection awarded AECOM and a team that includes OMA, Magnusson Klemencic Associates, and Matrix New World Engineering the final design contract for a resilience project along the Hudson River. The primary goal is to reduce flooding in Hoboken, which has 2.3 miles of coastal exposure, and parts of Weehawken and Jersey City.

The approach of this project, which HUD awarded $230 million through its Rebuild by Design contest, has four integrated resilience components:

Resist, through a combination of hard infrastructure like bulkheads and floodwalls, and soft landscaping like berms that might double as parks.
Delay, through policy changes and infrastructure that slow stormwater runoff.
Store, with green and gray infrastructure improvements, such as bioretention basins and swales, to capture stormwater.
Discharge, by enhancing stormwater management systems and upgrading infrastructure such as sewer lines.

Skidmore, Owings & Merrill, which is working on a separate project to redevelop Hoboken’s Terminal and Rail Yard into a mixed-use transit-oriented community with more than $100 million in improvements, is coordinating its efforts with the Rebuild by Design team, whose study area encompasses the terminal/rail yard.

Projects like these, where resilience is central to their design and construction, are becoming more commonplace, as developers and their AEC teams adopt positive measures to give their property assets a fighting chance of surviving the ravages of natural disasters, and to minimize recovery costs.

The replacement Ocosta Elementary School in Westport, Wash., which opened in the fall of 2016, offers a safe haven of refuge to students and residents who would have less than 30 minutes to evacuate in the event of a tsunami. The 23-classroom school includes the first vertical shelter in North America, a rooftop evacuation platform 53 feet above sea level that’s accessible via four flanking stair towers enclosed in concrete.

The platform, which is anchored by concrete piles that extend 55 feet into the ground, can hold more than 1,000 people and withstand a 9.2-magnitude earthquake and the impact of incoming waves. Resilience accounted for $2 million of the school’s $16 million project cost.

Three-thousand miles to the east, a seven-acre site with 1,700 lineal feet of shoreline along East Boston’s waterfront is being transformed into Clippership Wharf, a mixed-used development that will have 478 apartment units on two finger piers. Owner/developer Lendlease took over this project from a previous developer that had planned for lots of surface and underground parking. “That’s just not right for this day and age,” says Nick Iselin, Leadlease’s General Manager of Development. Lendlease rewrote the plan with several resilience measures, including replacing old seawalls that had been part of the site’s industrial infrastructure.

Lendlease is converting one of the piers into a “living shoreline” by creating a series of terraces for new salt marshes and a habitat for Boston Harbor, which is subject to a 10-foot tidal influence. The first floor of each building will be 24 feet above Boston City Base. All infrastructure and mechanical systems will be located above the 100-year flood level. Garage levels will be flood resistant.

To meet Boston’s “Living with Water” ordinance, Lendlease created a 1,400-foot Harbor Walk that will be 14-16 feet above the water level. In all, Clippership Wharf will have 189,830 sf of open space.

Back on the West Coast, there’s a 28-acre parking lot south of AT&T Park, where the San Francisco Giants play, that is subject to sea levels that vary as much as 24 inches. Predictions estimate those levels could rise to 66 inches by 2100.

“We needed to manage that risk,” says Kristen Hall, LEED AP, Senior Urban Designer with Perkins+Will, which has written the design controls for the proposed mixed-used redevelopment of this waterfront site, called Mission Rock. Eventually, it will encompass 11 city blocks and include eight acres of parkland, 1,500 rental units, and a million sf of office space. The Giants and the Port of San Francisco are co-developers.

The design, Hall explains, calls for the creation of a mesa down the middle of the site, with minimal frontages that may flood. She calls these frontages the site’s “sacrificial edges.” Other edges will include loading docks that create redundant elevated building access, as the majority of Mission Rock’s buildings would be at higher elevations. The park area would use a series of grade changes as design features, such as an amphitheater, a sloped lawn, steps, and ramps.

In July, the first phase of the Cornell Tech applied science campus was completed on Roosevelt Island in New York City’s East River. That phase includes The House, a residential complex with 350 apartments for staff and faculty, and Bloomberg Center, a four-story, academic building.

The buildout of this 12.4-acre, $2 billion campus is expected to proceed through 2043 and expand to two million sf. SOM, in collaboration with Cornell University and Technion – Israel Institute of Technology, is the project’s master planner. Resilience is key to protecting this property.

Colin Koop, AIA, SOM’s Design Director, explains that the East River is a tidal estuary, and significant portions of the site lie within 100- and 500-year floodplains. So all of the architecture needs to be elevated. The main pedestrian walkway, called Techwalk, will allow people to enter the campus at its periphery and then rise gently through its open spaces at a slope that is largely imperceptible. Once they reach the central ridge, they would be surrounded by permeable façades “that help create a synergy between inside and outside spaces on campus,” he says.

Cornell, says Koop, has been a “sophisticated client that is grappling with realities larger than itself and this project.”

Sustainable Benefits by Emerald Skyline Corporation

You have checked all the boxes on your due diligence checklist; but have you assessed the Climate Risk of Your Real Property Investment?

Resiliency takes center stage in new projects around the country