Rising Risks

These companies are trying to predict what climate change will do to real estate investments

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The race is on to predict climate risk, and these tech start-ups are in the lead

Investors are turning to a new breed of high-tech start-ups that can measure the risk climate change poses to real estate — from an hour to decades into the future.

And these firms count major corporations and cities as clients. One of them is Jupiter.

"We're essentially physically modeling what's happening with the atmosphere and the water or the fire at a very specific level of detail, and typically at the asset level, which is now only possible because computers have gotten so powerful and relatively inexpensive," said Rich Sorkin, CEO of Jupiter.

Launched barely three years ago, the Silicon Valley-based company already has over $40 million in investor capital from firms including Energize Ventures, Ignition Partners and Data Collective. It also receives funding from the National Science Foundation and NASA for work in cloud computing and satellite observations.

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

"We're seeing a dramatic expansion in large corporations coming to us, unsolicited, and saying, 'We need to understand the risk to this office complex or the risk to this hotel, or the risk to this power plant, or refinery, or neighborhood where we have hundreds of millions of dollars of mortgages out,'" Sorkin said.

He compared this new focus on climate risk to when cyber risks became a major threat.

"If you were a major corporation 10 years ago and somebody said 'cyber risk,' chances were a lot of people would say, 'What's that?' Now every large entity on the planet, business, financial services, governments, they are managing to cyber risks. It's just a fundamental part of their business," Sorkin said. "And the same thing will be true with risk from severe weather, accounting for the climate change that's already occurred and is inevitably coming over the next several years as well."

At Jupiter offices in Silicon Valley, New York and Boulder, Colorado, a staff of about 50, including a Nobel prize recipient and the former head of satellite data systems at Google, analyze specific properties using thousands of predictive data points. They then give clients a risk score going out up to 50 years from now.

Rich Sorkin, CEO, Jupiter
Source: CNBC

The new frontier

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

The head of global investment research at Heitman, a major real estate investment firm, Ludgin measures risk across the firm's approximately $42 billion in property assets under management across four continents. Climate risk is the new frontier.

"We see it as the unexplored risk that we need to try to quantify," Ludgin said.

Heitman partnered with the Urban Land Institute in a groundbreaking study on climate risk and real estate decision- making. It concluded that overall the real estate markets "are far from understanding climate risks enough to price them in today ... but those who are prepared have the potential to outperform."

"And we wanted to sharpen our skills and our ability to underwrite the risk of sea level rise, storm surge, wildfires, of the access to fresh water, heat stress," Ludgin said.

So Heitman turned to Four Twenty Seven Inc., a climate data start-up based in Berkeley, California. Its name is a reference to California's previous 2020 emissions target, 427 million tons of carbon. It was founded in October 2012, just after Hurricane Sandy.

This summer, the firm was acquired by Moody's, a major ratings agency. Like Jupiter, it tracks risks including hurricane, heat, extreme precipitation, and sea level rise. So far Four Twenty Seven has tracked climate impact on at least 2,000 companies and 320 REITs in 196 countries.

"Four Twenty Seven has built a strong platform for quantifying climate-related exposures and producing actionable risk metrics, which are essential to understanding and informing climate risk and resilience measures," Myriam Durand, global head of assessments at Moody's Investors Service, said in a release. "Moody's is committed to offering global, transparent standards for assessing environmental risk, and the acquisition of Four Twenty Seven advances our objective of integrating climate analytics into our offerings."

This is likely just the first of many moves toward factoring climate risk into big business and big real estate.

"Markets are just waking up to 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 in addition to the scores and relative exposure, is what is the world going to look like at this location in 10 years, 20 years, 30 years. Am I going to have five more days of flooding or 10 more days of high heat? What are the physical, observable outcomes?"

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

Bob Richling carries Iris Darden as water from the Little River starts to seep into her home on September 17, 2018 in Spring Lake, North Carolina.
Joe Raedle | Getty Images

"But we show them what the projections look like at points in time and give them an opportunity to engineer towards that," he added.

Both Four Twenty Seven and Jupiter go well beyond what insurance companies forecast, because, unlike insurers, they don't measure risk according to the past, but to the future.

"Insurance is basically a one-year contract, at the end of which the insurer gets to say, 'Oh, we'll keep insuring you, but here's the new cost,' or, 'Sorry, insurance is no longer available given the wind risk in your location,'" said Ludgin. "What we learned is that risk is not being priced into the underwriting that investors do as they think about an investment in Miami, for example. It's not reflected in the price. And our investors think that what they're getting when they hire our services is the ability to underwrite risk and opportunity."

And the risk is not just in the wind or rain or drought or fire. It is also in the cost of protecting real estate from all of them.

"What we've added into the mix is what if your insurance costs quadruple? What if your property taxes quadruple, or further beyond that quadrupling? And does the investment still make sense under that scenario?" Ludgin said.

The United States faces more than $400 billion in costs over the next 20 years to defend coastal communities from sea level rise, according to a study by the Center for Climate Integrity and Resilient Analytics.

That includes building 50,000 miles of coastal barriers in 22 states. Two years ago, residents in Miami voted themselves a $400 million bond, taxing themselves to protect their city from flooding.

"The last 2½ years have really been transformative in terms of the way the business community in the United States, and for that matter all over the world, is thinking about these issues," said Jupiter's Sorkin.

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

"Do we know whether or not there will be tipping points in climate that create acceleration of some of the effects we're modeling? We don't, but I'd say the rigor we apply outstrips any uncertainty," Four Twenty Seven's Freitas said.