The industrial revolution accelerated since the 19th century, characterized by human activity producing at a larger scale in various fields, such as agriculture and textile. More recently, we started to take into account the importance of how impactful climate change is on our lives, but also how it will impact our future generations. Companies and individuals have decided to take action to try to slow down global warming. Opting for solar panels or using bio-based materials for property construction can contribute to a greener real estate market for a better and more sustainable world. However this high-risk market will face multiple challenges as time goes by.
Causes and acceleration of climate change
Climate Change is primarily driven by human activity that increases greenhouse gas emissions, leading to higher temperatures worldwide and different ways of living for the population. Burning fossil fuels for various industries activity increased the emission of greenhouse gases to the atmosphere rapidly. For example, average atmospheric carbon dioxide levels have almost doubled in the last 150 years. Climate change is not only about global warming. Beyond higher temperatures, glaciers are melting, sea levels are rising and forests are burning, which represents another kind of risk for businesses and people. The population is giving more importance to climate change and governments create new regulations that businesses have to follow to ensure sustainability.
Impact of climate change on the real estate market
As per a report published by McKinsey, the real estate industry is responsible for approximately 40% of global combustion-related emissions. 28% of this comes from building operations. Due to climate change, the real estate industry may face coastal flooding. The reason behind this is rise in the sea levels which results in inland flooding. According to the World Bank report (2020), over 23% of the world's population is directly exposed to flooding that is more than 0.15 meters deep. For instance, in less than ten years, the ground in Jakarta, the capital of Indonesia and home to 9.6 million people has fallen by 2.5 meters (World Economic Forum, 2019). Since high-value real estate assets are located close to the coastal areas, they are at risk of storm surges and floods. This in return increases the cost of repairing and maintenance of the property. Flooding arises from coastal storms and heavy rainfall. Global warming increases the intensity and frequency of tropical storms like hurricanes, tycoons and cyclones. The past events have shown the impact of tropical storms on the value of commercial real estate property. There are other extreme storms like hail storms and tornadoes that are expected to increase in the coming years. This directly has an impact on the real estate owners due to damage to buildings, impact on rent due, and rise in the premium insurances. The risk of wildfires to the real estate market in vulnerable areas has increased. This discourages potential buyers and renters. Areas that are prone to such events tend to see decreases in property values.
Real estate market adapting itself and regulations from governments
A complicated network of laws and regulations has a big impact on the real estate sector. These include zoning and land use regulations that affect the viability and profitability of real estate developments, as well as monetary and fiscal policies that influence the cost and accessibility of financing. In the constantly shifting landscape, real estate professionals need to comprehend the historical background, the intended objectives, and the changing nature of these government interventions. Due to climate change, the real estate sector might face increasing regulations which may lead to the implementation of new housing policies. For example, Hong Kong's Climate Action Plan 2050 highlights the importance of green and energy-efficient buildings. By 2050, the city wants to cut the amount of power used by residential and commercial buildings by 20 to 30% and 30 to 40%, respectively, compared to 2015 levels. They also plan to expand the scope of its energy efficiency rule to apply to all structures, including data centers, that use a lot of energy. Construction, renovation, and demolition-related activities, such as material manufacture, transportation, and garbage disposal, greatly increase indirect emissions. The rising expense of carbon-intensive building materials will drive up the cost of construction. Apart from that, a greater portion of operating budgets for current structures will be attributed to rising energy and carbon prices.
Real-life examples
In January 2025, the city of Los Angeles faced devastating wildfires for several weeks. Starting on January 7, the fires rapidly reached the Pacific Palisades area, where a large number of homes, that are worth millions of dollars, have been burned. Later, another area of Los Angeles’ suburbs, this time in the North, was affected by the fires, where lower-income individuals’ homes burned. This situation will surely impact the real estate market in the city of Angels in the future. A climate-risk firm mentions that, by 2055, 84% of all U.S. homes will decrease in value, about 1,47 trillion dollars. Additionally, insurance firms will increase their prices to protect owners, and climate change will lead to higher risks. Nowadays, it is easier to estimate climate change in numbers and global warming will reveal costs that most of the population did not think about. These costs can be related to taxes increasing to pay for resilience measures, and energy and maintenance costs going up.
Conclusion
The real estate sector will undergo profound changes as a result of the impending climate change, including adjustments to investor and tenant needs, the value of individual assets, and the basic methods of real estate development and management. Intelligent players will anticipate these shifts and develop climate intelligence beforehand by comprehending the effects on asset values, identifying decarbonization options, and generating opportunities by facilitating the transition. Through these significant physical and economic changes, real estate will continue to reinvent how people live, work, and play in addition to being crucial in determining whether the world is successful in decarbonizing. Government laws that affect the real estate business are shaped in large part by associations and groups. These groups can affect the course of regulations and guarantee that the interests of the sector are reflected by interacting with legislators and taking part in the policymaking process. The emerging policy landscape and promoting positive outcomes can be greatly aided by the proactive engagement of the leading players of the real estate sectors and their collaboration with government stakeholders.
References
United Nations (n.d.) What is climate change? Available at: https://www.un.org/en/climatechange/what-is-climate-change
NSW Government (n.d.) Causes of climate change. Available at: https://www.climatechange.environment.nsw.gov.au/why-adapt/causes-climate-change
Reports and Articles:
Gall, A. (2024) The impact of climate change on the real estate market: An insurance perspective. Available at: https://www.bdo.com/insights/advisory/the-impact-of-climate-change-on-the-real-estate-market-an-insurance-perspective
Smail, E. (2023) The importance of climate change awareness to protect and save lives. Available at: https://www.climateimpactstracker.com/importance-of-climate-change-awareness/
Olick, D. (2025) U.S. housing market could lose nearly $1.5 trillion in value due to rising costs of climate change. Available at: https://www.cnbc.com/2025/02/19/us-housing-market-could-take-1point5-trillion-hit-due-to-climate-change.html
Rentschler, J. and Salhab, M. (2020) People in harm’s way. The World Bank. Available at: https://doi.org/10.1596/1813-9450-9447
Boland, B., Levy, C., Palter, R. and Stephens, D. (2022) Climate change impact on real estate. McKinsey & Company. Available at: https://www.mckinsey.com/industries/real-estate/our-insights/climate-risk-and-the-opportunity-for-real-estate
David, C., Arshad, M. and Baker, K. (2023) Sectoral risk briefings: Insights for financial institutions. UN Environment Programme Finance Initiative.
Azad, M. (2024) The impact of government policies on real estate: The evolving regulatory landscape in property investment. Available at: https://empire8property.com.au/government-policies-real-estate-investment/
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