Resilience: the ability to recover or adjust easily from misfortune or change. In the context of real estate, what does resilience actually mean?
That was the topic of discussion of ULI’s March 19th 2017 event that took place at the Eastside Exchange Ballroom, “Resiliency Now! Resilience Reality Check: Risk, Returns and the Future of Portland Real Estate”. The presenter of the day’s event was Dr. Richard Barkham, Chief Economist for CBRE. Before joining CBRE, he was Group Research Director for the Grosvenor Group and led the team that created Grosvenor’s Resilient Cities Report (RCR).
As institutional and sovereign wealth funds looked to deploy capital, Grosvenor found that investors needed a framework to look beyond annual volatility and returns but to assess the long term risk of potential planetary events. To meet this demand, Grosvenor analyzed cities across the globe in an attempts to measure a city’s ability to absorb shocks to its systems. In turn, those cities would need to be able to continue to maintain output of goods and services while providing its people with a good quality of life.
So how does one define resilience in terms of cities? The IPCC definition of resilience is the ability of a city to thrive as centers for human habitation, production of cultural development, despite that challenges posed by natural disaster, climate change, population growth and globalization.
Dr. Barkham stated that resiliency is a function of a city’s vulnerability moderated by its “adaptive capacity”. According to the Intergovernmental Panel on Climate Change, adaptive capacity is the potential or capability of a system to adapt to (to alter to better suit) climatic stimuli or their effects or impacts crisis.
What does adaptive capacity actually mean? Dr. Barkham explained that it encompasses a number of criteria. How effective is the local government? Does a city implement risk based land-management? What are its access to resources? What is a city’s level of community cohesion?
Globally, the three highest scoring cities were in Canada: Toronto, Vancouver and Calgary. Dr. Barkham said that these cities benefited from having Euro-urban planning with American economic drivers. At the other end of the spectrum, the least resilient cities are in emerging markets as many of the lack adaptive capacity such as Mumbai, Dhaka and Jakarta. Historically, capital sought out these markets due to their high returns, but more enlighten investors are taking resilience into account when considering long term investments. He stated that due to sprawl, American cities are not nearly as cohesive as other cities globally. Despite this, many American cities have significant capacity to bounce back from catastrophic events. Pittsburgh, Washington, D.C., Atlanta, Seattle and New York all scored high overall. In fact, many American west coast cities measured quite high compared to their international counterparts.
Dr. Barkham closed his presentation by proposing two questions. What does this mean for humanity and what does this mean for real estate? Grosvenor compared the average real estate investment yield of each of the cities in the report and found that globally there was a direct correlation between cap rate and resilience. Greater resiliency of a city, the higher property values and the lower cap rates. But what of a city’s inhabitants? Grovsenor found that cities with the fastest population growth tend to be the most vulnerable and least resilient.
After his presentation, two local real estate professionals where invited to join a panel discussion with Dr. Barkham. Carmen Merlo, Director of the Portland Bureau of Emergency Planning, and Ben Kaiser, Owner and Principal of the Kaiser Group. The moderator posed the first question to Ms. Merlo asking what she thought made Portland the most vulnerable. She stated that of all the bridges in Portland, only two are expected to survive a seismic event. Unfortunately those two bridges rest on large areas of liquefied soils. Another significant vulnerability was that many if not most of Portland’s first responders live in Vancouver, WA. Due to the vulnerability of the city’s bridges, if there was a seismic event, most would be unable to travel to Portland to assist its citizens. She also noted that Portland has the highest concentration of un-reinforced masonry buildings in the US. When the next earthquake occurs, most will most likely collapse. Ms. Merlo also mentioned that the vast majority of single family homes in Portland are not bolted to their foundations and that during a major seismic event, many would slide of their foundations. She did state that the city is investing in its infrastructure. For example, the city hopes to retrofit or replace the Burnside Bridge in the next 15 to 20 years.
Mr. Kaiser was asked, ”how is the market reacting?” He began by discussing Carbon 12, a new 8 story cross laminated timber (CLT) building currently being developed by the Kaiser Group. He stated that CLT weighs 80 less than concrete and studies show that it will perform better during an earthquake than those constructed of steel and concrete. His company has installed earthquake detection systems in its buildings to inform tenants in the event of a major seismic event. He stated the investment has had such a positive impact on rents that the system has already paid for itself. As a service to the surrounding community, the Kaiser Groups shares this data with local neighborhood associations.
The moderator then asked, how does investing in resilience impact the short term investor? Dr. Barkham stated that, according to recent econometric research, if you adapt your buildings to make them greener and more resilient, this will correspond to higher rents and lower cap rates. The future of most cities will rely on public private partnerships to reduce their vulnerability. Unfortunately, it often takes a catastrophic event to bring these matters home. Internationally, many cities are being red-lined due to their vulnerability to climate change, especially among enlighten investors.
The panelists were asked what they thought were some of the greatest risks to cities? Ms. Merlo spoke of social vulnerability, homelessness and lack of investment in communities of color. She also stated that people must understand that building codes are minimal standards and do not address usability after a catastrophic event. Mr. Kaiser mentioned that you can never plan for that “black swan” event. Meaning that no amount of planning can prepare a city for something that is unforeseen. That said, he believes affordability was one of the biggest threats that many cities face and many were losing their spirit due to a lack of affordability. Dr. Barkham stated that the acute social stress due to a lack of affordable housing is a global problem. There exists capital that “doesn’t know what to do with itself” but that there are investors who wish to deploy their investments consciously. He believes that real estate professionals should look for inventive ways to open up private capital to affordable housing.
Resiliency is a term that began to be used more frequently after hurricanes Katrina and Sandy. New York has made great strides in changing policy to adapt to changes in the earth’s climate. But what about other US cities, particularly those markets that sit in US coastal regions? Some might say that for many real estate investors, considering a city’s resiliency may not be realistic, at least at this point in time. Would one avoid a high performing market simply due to its level of vulnerability? Perhaps not, but maybe we as investors should consider how to we take vulnerability into account to protect our investments. As Dr. Barkham put it, real estate allows cities to preserve capital values and generate sustainable rental income in the long term, so proactively addressing these issues is what he refers to as “enlighten self–interest”. Perhaps this enlighten self-interest will have a greater influence on how cities and real estate investors work together in the future, to each other’s benefit and society as whole.