Weekend Interview: Moody’s Analytics Climate Expert Natalie Ambrosio Preudhomme

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On the Fourth of July, the global average temperature hit 62.92 degrees Fahrenheit, a level scientists believe made it the hottest day on Earth in 125,000 years. 

It only got worse from there. Extreme heat waves swept parts of the U.S. and wildfires ignited across Europe and most recently this week in Hawaii, claiming the lives of at least 55 people. In all, July was the hottest month on record.

These alarming milestones have major impacts on real estate. The sector is responsible for 40% of global greenhouse gas emissions and under increasing pressure to make improvements. Billions worth of assets are threatened by symptoms of the climate crisis, while insurance premiums have soared, meaning the effect of extreme weather events has now forced its way into investors' acquisition strategy.

Natalie Ambrosio Preudhomme, associate director at Moody's Analytics CRE, researches and advises on the impacts of climate risk, resilience and ESG within real estate markets and the built environment. She believes this year will push companies and investors to act with urgency on the climate crisis.

“I have seen these chronic hazards tend to get less attention in the CRE industry,” she said. “But I think the extreme heat that we continually are experiencing, just the records week after week after week, this year — I would predict that they really serve as that wake-up call.”

She spoke with Bisnow about the Moody’s Climate on Demand platform — which assess properties for exposure to floods, hurricanes and typhoons, heat stress, water stress, wildfires and sea level rise in order to help investors assess risk.

This interview has been edited for length and clarity.

Bisnow: You've spent your entire professional life examining climate change and its impacts. Obviously, the threats have been known for decades at this point, but it really seems things have been particularly alarming and urgent in the last few years. Have you noticed a change in the tenor of the conversations around climate change in recent years?

Ambrosio Preudhomme: Absolutely, yes, there's definitely been a change. Five or six years ago is when I started working specifically with the financial sector in bringing data to help institutional investors and lenders understand the way that climate change threatened their portfolios. Earlier on ... they did not understand that it was a systemic financial risk, they were confused as to why we thought they might want access to climate data.

But over the course of those years, there's just been a really increasing frequency of severe, catastrophic, climate-driven events that have had an array of different impacts — including financial and business damages — which had really been a wake-up call for many. It's changed the conversation to one of increasing urgency around a need to address this challenge.

Bisnow: So for a long time, it was considered a sustainability issue, not a financial issue. It was considered the right thing to do, not the business-friendly thing to do.

Ambrosio Preudhomme: Exactly. Initially, our conversations were with the sustainability teams of businesses. That still is the case sometimes. But when we're talking about this, this physical climate risk, we increasingly are talking to risk teams and investors — those who are making investment decisions around new assets. So it really has been a shift to where climate change is centered, and it's being seen as a risk that needs to be managed.

Bisnow: Last month, temperatures soared to all-time records in different parts of the world. Places in the U.S., the temperatures were in some areas were over 115 degrees Fahrenheit. What kinds of immediate impacts did that have on commercial real estate?

Ambrosio Preudhomme: There's been a range of impacts. There's a lot of assets and companies that had to shut down during the extreme heat, whether that's something like just shutting down outdoor dining because no one can sit outside, to there have been restaurants that have had to close because the kitchens were just too hot to cook in.

There's been a shift in tourism, where people have been canceling some vacations. There's been rippling impacts on travel as well, when we're talking about these really severe temperatures, that challenges airplanes' ability to take off.

It can actually change physical infrastructure, can affect rail lines. So all of these can end up reducing visitors to various commercial assets. The last thing that I'll mention is just increasing demand for energy and increasing energy costs. So there was just an article about energy costs soaring in Texas over the weekend, where so far the grid has withstood the extreme demand and extreme heat. But the costs have really skyrocketed.

Bisnow: From a workplace perspective, construction sites will be hit very hard by these weather conditions. I've read about some building companies having to do things like change to early morning shifts, or having paramedics on call.

In New York, back in June, when there were the wildfires and the city was full of smoke, workers on sites had to keep working, but with masks on. What kind of changes do you think are going to have to be rolled out, that will become the norm on these sites?

Ambrosio Preudhomme: I think all those things that you just mentioned. We've experienced on the West Coast similar things in past years with wildfire smoke, not specific to construction sites, but also city workers that had to be outside [and] their work had to get canceled during that day.

I was reading specific to construction, about changing practices. having to use ice baths to get some cement to set because it was too hot. So I think all of these things are just going to be becoming increasingly common practice. I know there's different things being published right now, but increasing, like the requirements around taking breaks, when you're talking about for heavy labor, I think that will be an increasingly important conversation topic. Because these are impacts on human health, as well as labor productivity.

Bisnow: Longer-term, what parts of the industry and what asset classes are most at risk from the fallout of these extreme heat events? 

Ambrosio Preudhomme: There's a range. Some things that I already mentioned, like the tourism industry, those that are maybe more around the perception and changing demand during these extreme events.

But then there's also assets that have high energy demand, assets like data centers, other assets, some industrial or manufacturing sites that both need, of course, hired humans for their operations.

And then additionally, those that rely on climate-controlled temperature — so pharmaceutical comes to mind, but other manufacturing and industrial systems that really rely on precise conditions, those which, in this regard, lead to even higher energy, just to regulate the climate conditioning of the building during extreme events. So those are some assets that come to mind as particularly vulnerable.

Bisnow: Extreme heat is getting a lot of attention at the moment because we're all feeling it so badly. But the climate crisis is going to affect real estate significantly. For example, I was just reading today, the U.S. Gulf Coast has seen sea level rises at a rate that scientists didn't expect to see until later this century. In South Florida, for example, there are more than 31,000 multifamily properties facing storm surge risk with a reconstruction cost of nearly $10B. How are these sorts of situations affecting people's acquisition strategies?

Ambrosio Preudhomme: We have seen large institutional real estate investors on the forefront of integrating physical climate risks into their decision-making. And so some of them have been using our [Moody’s Climate on Demand] tool that screens properties. 

And so that has just become a regular part of their screening and the consideration for a new asset. If an asset is flagged as having high risk to floods or sea level rise, let's say, then that asset goes into a separate part of the due diligence process where there's more detailed questions around things like asset-level preparation.

Because of course, the risk exposure, the physical phenomenon, is just one element of if that asset will actually incur loss. The other element is really around the types of operations that are there and then the way that it's built and if it has various resilience and risk-mitigation processes built in.

The one other thing I'll mention as a component of risk is also a broader risk. We do have clients, institutional investors who are looking at asset risk, and they're also now trying to factor in market risk, understanding that yes, it's important and useful if an asset itself is flood-proof. But if there's a storm and the surrounding area is inundated and workers can't get to work or supplies can't get to the site, then that will also create disruptions. And so also trying to factor in market-level risk exposure is a big element of this risk management. 

Bisnow: Do you ever deal with climate skeptics who say you're pushing an agenda? When we write pieces about climate change, we often get feedback from readers that we're blowing the issue out of proportion. 

Ambrosio Preudhomme: We do sometimes have questions initially. And I mean, we're present at a lot of financial and business events and real estate events. And usually at this point, I find that I do face less questions like that. But there are still the occasional question of 'Why is this relevant here? I'm talking about real estate transactions.'

But how we really frame this is, it's a risk and we we have a plethora of charts showing that financial costs to various locations and types of assets and businesses. The insurance landscape is one that's really become a key element in the real estate market just over the past year or two, the challenges in insurance.

The strategies that we take are we don't talk about sustainability or the mitigation side. But, if we're just talking about physical climate risks, we can really demonstrate that we're talking here about just resilience and trying to prepare for the financial costs of these things.

Bisnow: You have, of course, been analyzing how this is being felt in the insurance market. What's the area of most concern for you? Because in some states insurance costs have doubled and are eating up as much as 9% of property net income, as of last year, according to your analysis at Moody's.

Ambrosio Preudhomme: There's constant announcements of the challenges in the insurance industry. And to me, they're really centered around these areas that are increasingly experiencing these events after an event. So California being one of those with the wildfires, and then the Gulf Coast being the other one.

So Louisiana and Florida really come to mind as experiencing particular challenges. And that, of course, brings up nuances that state level, insurance regulation varies by state, there's a lot of factors driving changing insurance costs and market dynamics, which vary a little bit in those three states that I just mentioned. But the the various dynamics are already facing and then layering on top of that, the stresses of these repeated catastrophic events. Those areas are really in the spotlight.

Bisnow: Because the cost of insurance, as I've written about, and many of my colleagues have written out about, has killed deals, some people actually want lenders to lessen their demands for high insurance limits as part of their loan covenants. Do you think there needs to be lending reform when it comes to insurance? Do you think the current system is sustainable?

Ambrosio Preudhomme: I don't think the current system is sustainable. There are a lot of conversations around how something needs to give. I don't know exactly the shape that will take there.

I know in California, there have been a lot of conversations with the various players, the insurance regulator, the insurers themselves, those who are looking for insurance, really trying to strike the right balance. Development, ideally, needs to continue. But then when do we get to a point where we're financing development in high-risk areas, and essentially footing the bill for those who choose to be in these high-risk areas that we know are high-risk, there's a multifaceted conversation that needs to happen.

California last fall, the insurance regulator mandated that insurers give discounts for certain wildfire risk reduction measures at the asset. That, to me, is really focusing on resilience and risk mitigation is one really important approach to this insurance question. So yes, we want to be able to develop in these areas, yes, we know they're high-risk, who's going to foot the bill, but there is a win-win. If we can help incentivize building with resilience in mind that's relevant both for hurricanes and wildfires, that those approach there and I think have an opportunity for the conversations to go increasingly in that direction.

Bisnow: Give us a bold prediction for the rest of the year.

Ambrosio Preudhomme: 2017 was that year that there was those triple hurricanes, and then the kind of the first onslaught of really deadly wildfires in California. And to me that was a big wake-up call around the urgency of the situation.

And since then, of course, heat has been in the headlines, and we've known for a long time that it's deadly. But I have seen that these chronic hazards tend to get less attention in the CRE industry and other places as well. But I think that this extreme heat that we continually are experiencing, and just the records week after week after week this year. I would predict that they really serve as that wake-up call for more of these chronic stresses that might have slid a little bit more under the radar.

Those across the CRE industry, and others as well, that maybe didn't pay as much attention to these slower-moving hazards will see that they are also here. And there's both a need and an opportunity to act now to implement measures that really save lives but also save money and reduce business disruption if we prepare for the reality that these heat waves and increasing temperatures are really here.

Bisnow: What's your weekend routine or favorite weekend activity? 

Ambrosio Preudhomme: I love to get outside. Every day I try to go on a walk and try to spend more time outside on the weekend. This weekend's hike had to really be scheduled early in the morning, so I could get out and done with it before the heat. That's a key part of my weekend routine.