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Flood Risk Management for Commercial Real Estate

The challenge

More frequent and intense precipitation exposes real estate to increased flood risk.

Since the 1970s, insured losses from weather-related catastrophes, such as floods, droughts and thunderstorms have increased 14 times, in affected areas worldwide[1], growing from an average annual loss in the 1970s of $3 billion per year to $44 billion per year in the first five years of the current decade.

More than one-third of the world’s land area is flood prone, affecting about 82% of the world’s population, according to a World Bank study[2]. These risks and subsequent natural disasters have brought with them an uncompromising set of negative impacts on physical building assets, business continuity and asset values.

A strong need, therefore, exists to protect real estate asset value in the short and long term and ensure business continuity of tenants by making new and existing buildings more resilient to flooding events.

 The idea

Improve flood risk management and resilience of commercial real estate and occupier business activities through better assessment of building location and design, infrastructure and business continuity plans.

Asset owners and building occupiers can introduce more systematic flood hazard assessments of new and existing buildings and their business activities’ flood exposure. Through the implementation of flood mitigation features, evaluation of emergency plans and organisations’ readiness and recovery plans, flood risk can be better managed. The following are the key steps:

 

  • Establish a flood threat profile for the asset, the location of current flood hazard zones based on flood risk mapping (public institutions’ national/local flood maps and risk levels) and updated flood hazard forecasts; analysis of indirect risks such as power supply and infrastructure failures, collection of advice from statutory bodies (local authorities, national agencies)
  • Evaluate mitigation features and procedures helping to reduce flood threats (building design that provides protection against flood waters, the installation of back-flow valves in building plumbing and drainage systems, elevated podiums for parking spaces to protect vehicles from flood damage, locating critical infrastructure away from areas prone to flooding (plant, power supply, communications networks, toxic materials, emergency generators) or in elevated and protected areas
  • Analyse written plans for emergency procedures in case of flood warnings or actual flooding
  • Evaluate the state of readiness to activate plans
  • Assess protocols to ensure rapid recovery to return to “business as usual”

A best practice assessment scheme is JLL’s Building Emergency Management Assessment (BEMA) methodology (available in the USA and Canada) that covers natural, human and technical hazards. This holistic assessment scheme improves the understanding of flood hazards, reduces vulnerability to flood risk and helps structure the plans for business emergency procedures. It also prompts the implementation of building and equipment features for existing assets and business continuity planning to reduce risk of business interruption for occupiers.

While the BEMA assessment methodology has been around for a few years, availability of detailed location-related flood risk information is still limited to a few markets where real estate and business exposure is high or where recent flooding events produced substantial losses, such as for New York City after Hurricane Sandy. River and coastal/tidal flooding information is more readily available than surface water, pluvial or groundwater flooding information – these are more difficult to measure and depend on a variety of factors, requiring complex computer modelling.

Flood resilient building design is starting to be disseminated as the frequency of flood events highlight the need for adapted buildings. Resilient infrastructure design is well established and provides protection against flooding, from wall defences to sustainable urban drainage systems. Business continuity planning advice is readily available in all major markets spanning supply chains to core operational processes to critical infrastructure (communications, power, data centres).

The insurance/reinsurance industry has extensive experience with risk management and risk modelling for various natural catastrophes (earthquakes, storms, wildfires) and is an important source for more detailed disaster modelling.

The impact

A holistic flood risk and resilience assessment can reduce flooding related losses to building owners and businesses.

Detailed and current flood threat profiles for buildings help identify up-to-date probabilities and more precise locations of floods potentially damaging buildings or interrupting business operations. Through richer details, not only concerning direct flood hazards (river flood plains, seasonal and surface water flooding) but also concerning drainage and sewerage related issues, an in-depth assessment allows owners and occupiers to devise mitigation plans (e.g. storm water protection features, safe location of high value and process equipment, etc.) and business continuity procedures (ready pumps and hoses, de-energise electrical equipment in wet areas etc.). This leads to reduced vulnerability and damage in case of flooding, better protection against water ingress and related damage to buildings, which, in turn, provides increased safeguard of rental income and value of the real estate asset.

The barriers to innovation – and the solutions

There generally exists low awareness of and slow adaptation to changes in flood risk. Short-term value impacts due to flood risks may be difficult to calculate.

 Key internal barriers within organizations for adopting more systematic flood risk and resilience assessments are a generally low awareness of changing flood risks and potential impacts on asset values. Adoption of systematic flood risk assessment by real estate investors and building occupiers is slow and the availability of easy to use assessment tools has been low.

Key external barriers for enabling flood risk assessments are the limited availability of detailed and up-to-date flood risk information for river and coastal flooding, but also for surface water, groundwater and sewer system flooding.

Relatively good availability of insurance cover at commercially acceptable rates (more so for owners of large and geographically spread asset portfolios) leaves more detailed flood risk assessment low on property company priority lists. This averaging of asset risks through geographical diversification for large real estate investors is very wide-spread across globally diversified portfolios and building types. In addition, and in the case of let properties, the largest part of insurance premiums payable by property owners are usually transferred to building tenants’ service charges. There also exists, if only based on anecdotal evidence, relatively limited sensitivity of real estate values to increased flood risk in the short to medium term, in a given market.

However, current life cyclical or information related barriers are only slowing down the adoption of more flood risk assessments and resilience measures, as the trend for increasing extreme weather events in the medium to long term are widely acknowledged by science, the insurance industry and the real estate sector. Increased impactful flood events will increase awareness and the willingness of adopting resilience measures over time.

The way forward

Build real estate sector and occupier awareness alongside capacity for flood risk assessment and resilience planning

To overcome existing roadblocks the Real Estate sector needs to build capacity for in-house expertise on climate change and extreme weather related risks on real estate asset and portfolios. The Real Estate sector needs to encourage local and national authorities to establish and provide detailed and current flood risk information and updates to existing flood maps. Investors should review their flood risk assessments annually where high risks have been identified in the past, and plan to improve resilience of their real estate portfolios as necessary. Asset owners should be actively encouraged to make enhanced flood due diligence assessments for new investments that have high flood exposure.

Insurance and reinsurance companies, investors and lenders need to obtain a more accurate picture on shifting patterns in flood hazards and related risks, damage and losses. Insurance companies own an enormous amount of loss claim data which could provide a good complimentary source to identify actual flooding related damage and loss in addition to flood risk hazard maps that provide a more long-term view of risks.

Tenants need to be made more aware of potential business interruptions, not only based on local risks on a given site and its building operations but also on the potential impact to their supply chain. Business Continuity Plans should be put in place and, where flood exposure exists, these plans should be regularly reviewed for life cyclical readiness and recovery measures. Where in-house flood risk assessment capacity is not available specialist flood risk mapping and assessment organisations can provide flood risk advice and scenario planning services.

Asset owners and managers should systematically build detailed asset flood risk assessments into their due diligence process where flood risks exist. They should also periodically assess and reassess flood risk across their entire real estate portfolio. Real Estate sector-wide initiatives could raise flood risk awareness and mitigation information. Local and national authorities need to provide funding to create flood maps and/or update these maps regularly, with appropriate detail.

Besides systematic, process-led changes, systemic changes among key stakeholders can have a more wide-scale impact: the private insurance/reinsurance sector could establish closer cooperation with flood risk/environmental agencies on national and local levels in order to raise the level of flood risk knowledge. Enhanced risk and loss data exchange could provide insight into necessary long-term infrastructure-based flood mitigation measures and restrictive planning regulations. Increased dialogue between landlords and tenants can improve flood risk management. A collaborative introduction of flood resilience measures to buildings and business management processes could potentially mitigate any increase in flood risk in the future.

[1] Sigma Insurance Research, Swiss Re, January 2016; JLL Analysis

[2] Natural Disaster Hot Spots – A Global Risk Analysis, Dilley, M. et al., The World Bank, Washington, D.C., 2005