The Eddy, situated along East
Boston's waterfront, boasts over 250 luxury apartments with unparalleled views
of the Boston skyline. However, its prime location also exposes it to the risks
of sea surges and flooding.
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| An aerial image shows a red roofed house that survived the fires surrounded by destroyed homes and buildings burned to the ground in the historic Lahaina in the aftermath of wildfires in western Maui in Lahaina, Hawaii on August 10, 2023. |
During the envisioning of The Eddy in 2014, developers took proactive measures to address the vulnerability to extreme weather conditions. According to the Urban Land Institute (ULI), the developers raised The Eddy nine inches higher than the original property on the site. They strategically placed an emergency generator on the roof, installed an 18-inch floodgate reinforced with sandbags at the base, and incorporated coastal vegetation that can endure saltwater exposure. Additionally, the developers constructed The Eddy with walls capable of withstanding wind speeds of up to 100 miles per hour. These thoughtful design and engineering decisions aimed to enhance the property's resilience against the potential challenges posed by its waterfront location.
The strategic renovations
undertaken at The Eddy led to a remarkable reduction in its estimated flood
loss risk from $10 million to $1 million. This significant decrease translated
into flood insurance premiums that were ten times cheaper annually, along with
savings on wind insurance, as reported by ULI.
The completion of The Eddy's
construction in 2016 coincided with the increasing frequency of extreme weather
events. Consequently, insurance costs have risen, making climate-resilient
features more than just architectural enhancements—they have become valuable
tools for commercial real estate owners to curtail long-term property expenses.
Lindsay Brugger, Vice President of Urban Resilience at ULI, emphasized that beyond reducing insurance premiums, climate resilience can generate savings by lowering operating expenses, enhancing a building's marketability, and averting construction costs when faced with the impact of natural disasters. The broader perspective on resilience now encompasses both financial and operational advantages for property owners.
"Resilience should be for everybody. It does not need to be a luxury,"
emphasized Lindsay Brugger, highlighting the inclusive nature of resilience
efforts.
Supporting this perspective, a 2018
study by commercial property insurer FM Global revealed that for every dollar
invested in hurricane protection, a building can decrease its loss exposure by
$105. This underscores the cost-effectiveness of resilience measures,
demonstrating that the initial investment can yield substantial financial
returns by mitigating potential losses.
Furthermore, a 2019 report by the National Institute of Building Sciences highlighted non-financial savings. Implementing mitigation measures in line with modern building codes was estimated to potentially save 600 lives and prevent 1 million nonfatal injuries. This reinforces the broader societal benefits and well-being that result from incorporating resilience into building and infrastructure planning.
Climate’s insurance crisis
Commercial real estate properties
have experienced a significant increase in insurance rates, with an average
rise of over 7% since 2017, according to an August report by Moody's. This
contrasts with the typical yearly increase of about two to three percent.
“It’s not all really due to climate hazards, but that is one of the core
issues,” Kevin Fagan, the author
of the report and leader of Moody's commercial real estate analysis division,
noted that insurers are withdrawing from high-risk markets like California and
Florida due to concerns and pricing challenges linked to the growing frequency
of extreme weather events.
Christine Chipurnoi, an executive at USI Insurance Services, shared that her clients have faced "astronomical" premiums as a consequence. For instance, one Florida office property experienced a substantial spike in its annual wind insurance quote, soaring from $30,000 to $44,000 within just four weeks. The increasing costs highlight the financial impact of climate-related risks on the commercial real estate sector.
"The market is just changing so fast," remarked Christine
Chipurnoi, reflecting on the rapidly evolving landscape of the insurance
market.
Major commercial real estate trusts
have recognized climate risk as a significant threat to their financial
stability. In February, Vornado Realty Trust, for example, highlighted the
concentrated nature of its investments in markets like New York, Chicago, and
San Francisco, making it particularly susceptible to damages and elevated costs
from natural disasters.
The company acknowledged that climate change could lead to increased expenses for property insurance, energy maintenance, and damage repair, potentially resulting in declining demand for office and retail space or hindering the ability to operate buildings effectively. This acknowledgment underscores the real and imminent challenges that climate-related risks pose to the operational and financial aspects of the commercial real estate sector.
Boston Properties and Highwoods
Properties echoed similar sentiments in their own 10-K filings, acknowledging
the impact of climate change risks on their properties.
As climate change risks contribute to the increasing unavailability of insurance, commercial property owners are adopting a proactive approach by focusing on weather-proofing their assets. Rather than relying solely on expensive insurance coverage to address potential damages, there is a growing recognition that investing directly in the resilience and sustainability of assets makes more sense in the current landscape. Tony Liou, President of sustainable engineering firm Partner Energy, emphasizes this shift, highlighting “Investing in the asset as opposed to depending on insurance coverage just makes more sense nowadays.”
Climate resilience is ‘not a
nice-to-have’
Accordingly, the expense of
climate-resilient architecture is now more than just a luxury; it serves as a
method for obtaining reduced insurance rates and decreasing expenses over the
long term.
In California, for instance,
insurance companies must provide rate discounts depending on the preventive
actions property owners have implemented to safeguard their properties, such as
installing fire-resistant vents or opting for a Class A fire-rated roof.
Even though the upfront costs of
weather-proofing construction may be significant, Fagan noted, "You do kind of get paid back."
As per a ULI case study, a resort in south Florida managed to save an estimated $500,000 in annual insurance premiums by incorporating hurricane-proof windows, situating electrical units above storm-surge zones, and implementing other climate resilience measures.
At times, the focus isn't solely on
obtaining cheaper insurance but rather on securing insurance coverage
altogether.
Chipurnoi emphasized, “Climate-resilient architecture makes you
writable.” This means that it encourages more insurance companies to engage
and provide quotes.
Holly Neber, the CEO of AEI Consultants, specializes in assessing
risk for commercial real estate and has observed firsthand how clients can be
excluded from insurance coverage if they don't incorporate climate change
mitigation for their properties.
In a recent consultation involving three 1970s vintage multifamily buildings in Miami Gardens, Florida, the owner faced the necessity to increase the property's wind insurance policy by 850 percent—from $5 million to over $47 million—to meet new lending requirements. Following an initial risk assessment, insurance firms were only comfortable covering an additional $5 million.
“The owner was stuck. How could they refinance if the required wind
coverage was not available?” Neber questioned.
However, the buildings underwent a
weatherproofing transformation, including new roof truss framing, hurricane
ties on the rafters, plywood sheathing, and new windows.
Renovations that might have been
considered unnecessary in the past now empowered the client to approach
insurance companies with a fresh risk assessment of wind damage. This persuaded
more insurers to support the $47 million insurance policy.
Apart from securing better insurance deals, the absence of weather-proof features has made it increasingly challenging to convince insurers to participate from the outset.
According to Neber, climate
resilience then "becomes not a
nice-to-have, but it’s integrated into good risk management and good
investment."
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