By Nancy Amdur
Resilience may not be a buzzword heard as often as sustainability in the real estate industry, but it is becoming a topic more companies are addressing.
“Just like sustainability was a new word in our real estate investment vocabulary maybe a decade ago, resilience is just beginning to enter our vocabulary,” said Lynn Thurber, chairman of Chicago-based LaSalle Investment Management, a global real estate money management firm.
Planning for natural disasters and climate change issues, such as tornadoes, earthquakes, sea-level rise and heat waves, is becoming more central to real estate companies’ assessment of properties, according to Thurber and other industry experts on a panel discussing the topic at the Urban Land Institute’s “Building the Resilient City: Risks and Opportunities” conference held this month in San Francisco.
Preparing portfolios for adverse events makes sense as real estate tends to be fixed-long term assets “yet [properties] sit in a volatile changing, dynamic world,” said Jonathan F.P. Rose, president of Jonathan Rose Companies, a New York-based green real estate development, planning and investment firm.
“If you have a major physical asset exposed to the environment over the very long term, good and bad things can happen to it. If you are an investor, you have to think through those before you commit to it,” said Hamid Moghadam, CEO at San Francisco-based industrial real estate company Prologis, Inc.
Considering resilience “is just part of everything we do to maximize value to our investors and the assets that we own and manage on their behalf,” said Thurber, who also is the chairman of ULI.
Looking at the resilience of a property and disaster planning carries various business benefits, panel members said.
For example, a company with a disaster plan that gets buildings up and running quickly after an adverse event can gain reputational benefits, said Moghadam, adding that his company’s Northeastern facilities flooded by Hurricane Sandy in 2012 were back operating within 48 hours.
“An important aspect of resilience is customer service and reputational risk for an organization,” he said. “It’s a competitive advantage. People remember how your organization reacted in a time of difficulty and whether you had the capability to get to your customers and get them back online.”
Insurance companies also might take note of how quickly a company responds.
“When your insurance companies see that your property was back online and had less damage and less cost, your capability to continue to get the same levels of insurances and work with insurance companies on coverage and cost of insurance is enormously impacted,” Thurber said.
A study of resiliency should include looking at a property’s surrounding community and region to assess what local network systems are in place to handle adverse events, Rose added.
Working more closely with communities on resilience and how it impacts the surrounding area as a whole rather than just individual buildings might be a next step for real estate companies, Thurber said. “We have to figure out how to connect that principle of what our fiduciary responsibility is to our client with this bigger picture of resilience at the community level and how that can either reduce costs or enhance our performance of our portfolio over time.”
“If we only protect our building and we’re not thinking about it at the community level, then we’re being very short sighted,” she added, “because you can’t totally protect your building without protecting the community.”
Panel members agreed that one hurdle facing the industry en route to resilience planning is behavioral economics. People tend to quickly forget about an uncommon event, such as a large earthquake, or assume it won’t happen again for a long time, so they may become lax about planning.
“We all have short memories,” Thurber said, “and when the event occurs, you are not prepared.”
It is worthwhile thinking about “how people make economic decisions and how the human mind works in assessing these kinds of risks,” said Moghadam, who also is a ULI trustee and member of its board’s executive committee.
“You can’t insulate yourself from climate issues anywhere. You have to be able to deal with assets that have challenges and be prepared to mitigate them or to have a plan to deal with them,” he added.