What the Texas Storms Mean for the Future of Real Estate
As Americans, we rarely think about the miracle of a system that allows water to come out of a tap when we turn the handle and the lights to turn on at the flip of a switch. All of the millions of miles of pipes, poles, wires, and power plants that create our increasingly fragile public utility system are often taken completely for granted. A night without power is a terrible nuisance, “Why haven’t those linemen fixed the poles already?!” some might say. “Don’t they know how inconvenienced I am!?”
The Texas ice storm that caused over $50 billion in damages and killed over 40 people from cold-related events alone should be enough to have us reconsider the fragility of our utility ecosystem. Texas, the state with 110+ degree summers and winters with a 50-60 degree average high temperature can now be blanketed with snow and hit below zero. While there was some electric capacity reduced from wind turbines, the vast majority of the problems came from the freezing of natural gas and water pipes that supplied the power and water treatment plants. And it’s not like Texas wasn’t warned, the state nonprofit for thirty years has said that winterization and insulation of the pipes was needed to prevent catastrophic failure. No one should be blamed for weather events out of our control, yet we should certainly examine the decades of leadership that left Texas in such a fragile position. And it’s not just Texas, the entire American energy grid is weakened from a lack of substantive investment in maintaining the infrastructure.
As prudent real estate investors, it is important to consider not only the macro-economic factors of investments, but the collective realities of both where the climate and society is heading. Our buildings do not exist in a bubble, but rather in a world that is ever-increasing in complexity. Those who keep a calm head towards current assets with an eye to future-proofing their investments will be those will are most rewarded in the long run. Hopefully this storm will reset our collective understanding of the need for renewed infrastructure investment, something that all real estate investors should collectively cheer. With renewed investment into these utilities comes more stability and predictability, something I hear that banks and lenders like. With that said, here are the biggest take-aways that real estate investors should keep in mind in the wake of these storms.
1. Climate Change is Here to Stay
In one of the most damning pieces of evidence of the impact of climate change, we are currently experiencing over 67% more climate-related power outages than in the year 2000. It’s not just ice storms that are on the way, remember the power outages due to wildfires that have been roiling the West over the past few years? Don’t forget either the hurricanes that seemed to hit Louisiana every single month during the worst hurricane season on record.
Floods, hurricanes, drought, extreme heat and cold, and just about any other environmental problem: if you can think of it, it’s coming. These events will be more frequent and more severe, so people who are not aware and planning for these contingencies will be caught with their pants down. This is not isolated to any one part of the United States; every state will have its own unique challenges to prepare for. Murphy’s law seems like less of a tongue-in-cheek adage and more of one of the laws of physics as days go by.
Costs of frozen pipes and replacing them add up. We all know that insurance companies are going to start making premiums more expensive after every major storm, god forbid they actually save you money. Being a plumber in Texas right now means you’re going to be in the green for the whole year. However, if you’re like most business owners, you don’t want to have to replace all your pipes every time a 100-year storm actually happens every 10 years. Insulation and weatherproofing buildings will be paramount to saving money in the long run.
2. Resilient Buildings are Profitable Buildings
One Texas Homeowner’s lights stay on because of their Tesla Powerwall
If you haven’t seen the pictures of certain homes being lit up despite the power outage in Texas, here is one above. Due to their self-generating solar and Tesla Powerwall battery storage, they were able to keep their houses heated and lighted when other residents were without power for weeks. How much would you have paid to keep your children or family warm and lit during a crisis like this? My guess is a lot of money.
Resilient buildings will likely command a price premium in the years to come. We already know that LEED-certified buildings tend to command a valuation and rent premium over their peers. California is requiring all of their new-construction commercial buildings to be net-zero energy by 2035, meaning that the buildings generate enough power to sustain themselves. These buildings are coming, and I suspect we will see an acceleration towards designers and owners wanting assets with these high levels of performance into the future. Combine that with an ever-growing demand of ESG principles in real estate investing, and these resilient assets will soon become standard. 20 years is not a long time in the real estate industry, and do you really think anyone will look twice at a 1970s building that leaks energy like a sieve when you can buy a 2030 building that can generate its own electricity? You tell me. Certainly not without a huge price discount.
When I go to rent to my corporate tenants 20 years from now, do I want to be presenting them with a building that can keep their computer servers running (since data will be ever-more important) or one that is at risk of a bad storm ruining access to the building? When a tenant is shopping for an apartment, will she want to put her family in a building that her children could literally freeze to death in or in one that will almost-guaranteed be powered year-round? Amenity creep in real estate is real, and green amenities will at some point no longer be “social benefits” but required attributes.
3. Markets with Climate Danger at a Risk Premium?
This section is more speculation, but let’s analyze the future with a long-term perspective in mind. If I am an institutional investor, one of the types who set market cap rates and have access to all the capital, I always want to be minimizing my risk for the maximum return. If we are talking about cap rates, riskier assets have to command higher cap rates (and therefore lower valuations).
When I look, then, at an ecosystem like Texas that has one of the worst power grids in the country, is that not an institutional ecosystem risk that can possibly damage my asset? If Texas is not keeping up with the future by reinvesting into its infrastructure, eventually its appeal of cheap land, good schools, and low taxes will be offset by the dangers that your asset is going to suffer irrevocable damage from grid or water supply issues that are out of any individual investor’s control. The question may be for these locales, not how can we afford it, but rather how can we not afford it? Keeping up a desirable center for investment requires constant reinvestment by local governments.
I don’t think Texas is alone here; we’ve seen with Pacific Gas and Electric in California the dangers of privatizing the energy grid. They will spend as little as possible to actually provide the services they need to provide and just litigate and settle their way out of destroying people’s homes and lives. Can you really blame them? That’s how our legal and economic system works. But that doesn’t mean that if I, as an investor, have to look at a state that has power shutoffs literally every year due to wildfires that I won’t think twice before investing in California.
Rising sea levels in Florida are already affecting their real estate values. The more exposed a property is to rising sea levels and flooding, the less it has appreciated in value. And we’re not even in the full dangers of flooding yet, with places like Miami expected to have $20 billion of assets underwater by 2050. Investors in the future will look much more closely than they have at climate risks when assessing real estate values, the question is only, how soon?
4. Winners and emerging asset types
I have outlined here how I believe resilient buildings will be one of the biggest winners for the future of real estate. A few asset classes that are only fringe now will likely be more and more important in the future, namely those of renewable energy generation and storage. Solar energy is already the cheapest type of energy to produce in the world, and this is before massive incentives likely to come from the Biden administration. We will have an ever-increasing demand for power that is the result of a growing population (and a growing use of bitcoin!), which combined with the divestment from fossil fuels will lead to a boom for land plays in the solar and wind environments. Additionally, we will need places to store this excess energy generated in case of extreme weather events like we have seen, ideally close to population centers where the power is most needed. Thus, I predict we will see much more premium on agricultural land close to city centers for the purposes of energy storage and creation. We need the power to be close to the population centers themselves because the further out the systems are from the actual consumption centers, the more risk we introduce to the system.
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