Extreme weather events, rising insurance costs, and an increased focus on climate resiliency as a part of ESG initiatives are driving action to “harden assets” – taking measures to reduce impact from wind, flooding, fire, and extreme heat.
“The more proactive owners are going to do these things and spend the money, even if it means lowering the return on investment for their investors,” says Barry Wood, an executive vice president and director of operations at JLL. They recognize that they need to protect the integrity and value of the asset, he adds.
In other cases, it takes an extreme event to drive action. For example, Wood recently dealt with a property in Memphis that was hit by a tornado where the majority of rooftop units blew off in the high winds. In addition to losing the equipment, the units became projectiles that caused more damage after they became airborne. Those are the types of events that make people sit up and take action. The owner is now looking at reinforcing the roof and making sure equipment on the roof is strapped down, says Wood.
Owners also are being galvanized by surging insurance costs and growing risks related to extreme weather events. The estimated total economic costs of direct physical damage and net-loss business interruption from global natural perils in 2023 was $357 billion, with public insurance entities covering about one-third of those losses, according to Gallagher Re’s 2023 Natural Catastrophe and Climate Report.
Gearing up for bigger threats
Managers are gearing up for the official start of hurricane season, which for the Atlantic basin runs from June 1 to November 30. And weather forecasters are predicting a “very active” hurricane season in 2024 due to record warm water temperatures. Researchers at Colorado State University are forecasting a high probability for 23 named storms and 11 hurricanes, five of which are likely to be major hurricanes (category 3-5).
And while owners are focusing first on those properties in higher-risk geographies, major events are expanding well beyond the typical coastal hurricane regions. For example, following Hurricane Sandy in 2012, people were very concerned about protecting coastal assets from storm surge. Since then, there have been more cloudburst events with heavy precipitation in both coastal and inland areas, notes Julie Pietrzak, P.E., ENV SP, CFM, a principal and Sustainability & Resilience Practice Leader at Thornton Tomasetti, an engineering and consulting firm. “You have inland properties that maybe don't have flood insurance at all because they're not part of the FEMA community rating system, but they're getting flooded from heavy precipitation events,” says Pietrzak.
Those events are soliciting a reactive response from property owners who now are concerned about flooding. According to Pietrzak, preventative measures typically include barriers around the facade itself and around the building envelope to keep water out of the building. Consultants also often recommend relocating utility critical rooms as a step to create greater operational resilience. It’s a matter of taking a “belts and suspenders approach” so that even if water were to breach the building façade there is a second line of defense around your critical utility rooms, says Pietrzak.
Growing business case
Steps to improve resiliency range from adding back-up generators and water-tight windows and doors to improving water runoff management. Improving resiliency to provide health & safety to building occupants is an obvious motivation. There also is a business case for spending money upfront to protect against future losses. According to a study conducted by the National Building Institute of Sciences on FEMA grant funding that went to properties that incurred damages from hazards, every $1 that was spent on mitigation could save up to $13 in future repairs, depending on the event.
However, it can be difficult to make a business case for improving resiliency because there's no way to pencil out the return on investment on paper unless there is an event, says Wood. That’s why it is important to work with your insurance company so you can show tangible savings on lower insurance rates, and the longer-term financial benefit of lower premiums on those proactive actions, he says.
Regardless of where properties are located, property owners across the board have experienced record increases in insurance costs over the past several years. In addition, many insurance companies are starting to raise deductibles. Instead of $500,000, an owner may have to pay the first $2 million if there is an event. “One claim motivates an owner to spend the money on the front end for prevention,” adds Wood.
In addition to doing the work, it is important to communicate those details to your insurance company. “Whether you're investing cap-ex in hardening of your assets or engaging in pre-planning and post-planning for weather-related events, if you can show that to your insurance carriers, that really resonates with them,” says Martha Bane, managing director of the property practice at Gallagher, a global insurance and consulting firm.
The insurance industry is now relying more heavily on models to help predict estimated losses from natural disasters. “So, the more data that you can provide to your insurance carriers about how you harden the asset, it generally improves the model results,” says Bane. For example, in wind-prone areas, it is important to share information about the age of roofs, your maintenance and inspection program and whether or not you have taken steps to anchor equipment to the roof. “Being able to add those data points to the statement of values that you provide to the market is very, very helpful because all of those information points get put into the model and can help improve the output,” she says.
Developing a roadmap
The starting point to developing a strategy for improving asset resiliency is to perform a climate risk assessment, and then from there conduct a vulnerability assessment for a property or portfolio of properties. Those assessments help building owners and managers prioritize risk mitigation over the short, medium and longer term. The next steps are unique to the situation based on factors such as the type of structure, use and location, as well as the investment strategy and risk tolerance of the owner.
“We really try to help our clients understand the lifecycle analysis of these costs,” says Pietrzak. It’s important to take a longer look at the probability that a disaster may occur; what could potentially happen; where vulnerabilities at a property exist; and what could be the potential damage as well as potential costs to repair and recover. Is it worth spending the incremental cost upfront to mitigate that, rather than deal with repair costs down the line or even full replacement of some equipment?
One common mistake that owners and managers make is not having all of the stakeholders in the room when making decisions on risk mitigation measures. In particular, it is important to have facility managers and building engineers at the table, because they have a hands-on knowledge of building equipment and what will or won’t work.
Partnering with your insurance provider and consultants to identify and better understand the risks can help to inform strategies on how to mitigate them. For example, insurance companies such as Gallagher have invested heavily in platforms that allow them to better identify exposure to weather-related events. “Having that discussion with your broker and your carrier can really help hone in on what will make the most impact,” says Bane. “You don't want to spend money for the sake of just checking a box, it has to be meaningful.”