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Investors and Tenants Want Landlords to Be Ready for Severe Weather

Industry experts say that factoring in climate risk is becoming the new normal for our industry. What can you do to decrease your risk?

Photo Courtesy of ICSC.

The storms and swelling seas arguably attributable to climate change have begun to pose some unconventional and unprecedented challenges to retail landlords and tenants.

As retail businesses look to one another and to the state for long-term solutions, government agencies are responding with less than optimal urgency, argues Michael Smith, real estate director of Washington, D.C.–based Streetsense, a design and strategy collective. “Municipalities have a long track record of being lax on codes for developers, and that continues, so most of the responsiveness thus far has been a Band-Aid.”

Meanwhile, sobering data are emerging on the industry’s growing exposure to high waters. U.S. retailers have nearly 7,000 facilities exposed to rises in sea level, about 2,000 vulnerable to hurricanes and typhoons, and some 17,000 at risk from floods, according to Four Twenty Seven, a Berkeley, Calif.–based climate-risk data firm. In Europe some 20 percent of nearly 21,000 retail spaces are exposed to floods and/or rises in sea level, Four Twenty Seven reports. London has the highest number of such flood-prone retail spaces; the sites that are most vulnerable there are exposed to a 20 percent probability of annual flooding, the firm says. Walmart, the world’s largest retailer by revenue, faces probably the greatest risk among merchants, as some 14 percent of its stores worldwide are exposed to hurricanes, and 16 percent to floods.

The managers of some centers in low-lying areas are taking action. In Singapore, where dozens of floods have hit retail parks in recent years, a growing list of shopping centers — including Forum The Shopping Mall, Liat Towers, Lucky Plaza and Tanglin Mall — are boosting protections by adding on flood barriers, debris-trapping gates and drainage canals. City officials are looking at ways of developing artificial land that can presumably survive projected end-of-the century devastations.

Photo Courtesy of ICSC.

Flood-controlling “resilient design” is evident on the green roof of Klépierre’s Alexandrium Shopping Center, in Rotterdam, the Netherlands. With subsidies from the city, seven types of sedums (perennial flowering plants with thick leaves) are planted across the 237,000-square-foot roof area to help buffer rainwater and decrease heat gains.

In Miami, a city already struggling with chronic flooding from rising sea levels, some retail structures are adapting. One of these is the $1 billion Brickell City Centre, on Biscayne Bay. This retail center, with a Saks anchor and four levels of upscale dining, was built higher than the floodplain and has an elevated seawall. Its developer, Hong Kong–based Swire Properties, also installed flood gates that can rapidly seal off the two-level underground parking lot. Most of the built environment in Miami, meanwhile, sits at an elevation of six feet or less.

In flood-prone Japan, the owners of the 2-year-old Aeon Mall Kahoku, in Ishikawa Prefecture, have sought to reduce the risk of flooding by building that center at a higher position than the 100-year flood levels.

San Francisco’s Embarcadero is a tourist haven offering restaurants, shops and museums, but beyond that, it is also a San Francisco Bay seawall helping to safeguard roughly $100 billion in buildings and businesses. City officials concede that the development is crumbling, however. To be sure, there are plans under way to make fortifications — at a cost of some $2 billion, but that pales in comparison to the $450 billion needed to safeguard the city itself against the 40-to-80-inch rises in sea level that some are projecting for late this century.

Some of the waterfront retail properties Smith has worked with have similarly built above floodplains and are rethinking first-floor uses to make tenant spaces more flexible and flood-resilient, he says.

In the wake of the 2017 record rains that closed Sawgrass Mills, in Sunrise, Fla., for three days and caused some $30 million in losses, the multicity South Florida Water Management District is looking at closed golf courses and similar vacant properties for use as possible water-storage facilities to help support aging and overwhelmed drainage systems.

Flooding has become commonplace for downtown retailers in such Atlantic coastal areas as Annapolis, Md., which was hit by a nearly 7-foot storm surge from Hurricane Isabel in 2003. Tidal flooding in Annapolis has increased by some 900 percent since the 1950s. While awaiting state and federal funds for a new underground drainage system, the city is installing additional pumps and backflow preventers.

“In central Albania in 2017, about 100 people had to be rescued from the flooded City Park shopping center, in Kashar”

Of course retail tenants, too, feel the pains of storm intensification. In the year before now-liquidated retailer A’gaci filed for Chapter 11 bankruptcy protection, its Caribbean and U.S. locations got slammed in some of history’s most destructive hurricanes. The majority of the chain’s affected stores were in Florida, Texas and Puerto Rico, areas that also represented some of its most-profitable units.

Record downfalls are threatening inland centers too. In June, as heavy rain and hail poured through the ruptured roof of Mexico’s Plaza Patria shopping center, in Zapopan, Jalisco, flooding out the first level, hundreds of patrons had to dash frantically upstairs. In central Albania in 2017, about 100 people had to be rescued from the flooded City Park shopping center, in Kashar.

Record floods also have insurers scrambling to adjust commercial rates, many companies often changing 500-year flood-risk status to 100-year. About 80 percent of the commercial properties affected by hurricanes Harvey and Irma are located outside flood-zone maps, meaning that many of those business owners were in fact underinsured, according to BlackRock, a New York City–based global investment firm.

In 2017 retailers took a nearly $3 billion hit from Hurricane Irma and a roughly $1 billion hit from Harvey, according to Planalytics. In 2018 Hurricane Florence cost retailers about $700 million. Senior analyst Oliver Chen, of New York City–based Cowen, notes in a 2018 report that smaller, off-mall retailers are the hardest-hit in weather disruptions because they have greater difficulty making up sales losses.

Real estate investors come behind no one in eyeing climate risk. Mary Hogan Preusse, founding principal of Sturgis Partners and a member of the Kimco Realty board, asserted at NAREIT’s REITwise: 2019 Law, Accounting & Finance Conference that companies must not fail to take these environmental and social responsibilities seriously. They should “realize that it’s top of mind for many key investors,” she said.

David Bujnicki, Kimco’s senior vice president of investor relations and strategy, says the company’s properties are increasingly geared to “resiliency and level of preparedness,” though he points out that Kimco does not attribute such programs directly to climate change or to coastal proximity. “That said, we have invested significant resources to prepare for natural disasters,” he said.

Thirty-five percent of REITs have geographic exposure to such climate hazards as inland flooding, hurricanes, typhoons, elevated sea levels and coastal flooding, according to a joint 2018 report from Four Twenty Seven and real estate tech firm GeoPhy that covered some 73,500 properties under the ownership of 300 REITs. Most REITs are now assessing flood risks annually, Unibail-Rodamco-Westfield notably among them: Its properties are analyzed for potential maximum losses to determine appropriate insurance coverage.

“Flood-related value decreases across 17 coastal states between 2005 and 2017 totaled some $16 billion”

In New York City, where 70,000 buildings sit in the 100-year floodplain, about 250 flood-control projects are slated for completion in 2025. Some 30 percent of the roughly 1,000 shops, restaurants and other businesses in Lower Manhattan closed down for a week in 2012 in the aftermath of Hurricane Sandy, reports the Downtown Alliance. That storm also caused supply-chain disruptions, which hurt those stores then trying to prepare for Black Friday sales.

Property-value losses in the flood-prone areas are no less a reality. Flood-related value decreases across 17 coastal states between 2005 and 2017 totaled some $16 billion — with Florida, New Jersey, New York and South Carolina each seeing about $1 billion in losses, according to First Street Foundation, which quantifies the impacts of flooding and sea levels.

For the most part, coastal cities in Florida and Texas are slow in creating long-term storm-drainage solutions, observers say. In the Houston area, where two 500-year floods struck within a 24-month span, it has been nearly impossible to develop retail space, says Jason Baker, a partner of Houston-based Baker Katz. “The burden of getting this fixed is placed squarely on the shoulders of developers, rather than [having] cities [find] a permanent solution,” he said.

Houston-area leasing is slowed also by a hodgepodge of new floodplain regulations in various Harvey-flooded cities, notes Baker. One retail tenant that leased an end-cap space at a center that had taken on five feet of water during Harvey heard from Houston planning officials that it would have to elevate its slab by 18 inches before it would be allowed to open at that property. “And that’s after other center tenants reopened there without restrictions,” Baker said. The landlord, for its part, insisted that it had no contractual obligation to raise any spaces, Baker notes.

In August Allied Orion Group board member Kirk Tate told BisNow that the first question insurers ask Houston-area businesses seeking flood coverage is whether they got flooded during Hurricane Harvey. “And if the answer is, ‘Yes, we flooded,’ that property is excluded,” Tate said. Harvey, which hit in 2017, is the second-costliest natural disaster in U.S. history, having caused some $125 billion in damage.

There is some municipal flood-control aid available at inland centers. Wynnewood Village, a Dallas retail center that dates back to 1949, got an assist from a recent bond package that funnels about $1.7 million to storm-drainage improvements surrounding the center.

“Risks such as sea-level rise and heat stress will increasingly highlight the vulnerability not only of individual assets and locations, but of entire metropolitan areas”

Even as retail landlords grow progressively greener (if the swelling numbers of LEED certifications are any evidence), the retail tenants might lag, in part because of “renter’s market” dynamics, in some cases, notes Smith. “Landlords may be as green as can be, but they aren’t putting pressure on tenants to be the same,” he said. “They may make suggestions, but they’re falling short of requiring, because of the difficulty of leasing space.” Similarly, most retailers have failed to make product-transportation networks more energy-efficient because of their need for speed in competing against online rivals, Smith notes.

Topics at this year’s ICSC Beyond Sustainability Summit focused on such topics as structure resiliency, storm-water management and site cleanup. “Risks such as sea-level rise and heat stress will increasingly highlight the vulnerability not only of individual assets and locations, but of entire metropolitan areas,” noted Edward Walter, CEO of the Urban Land Institute, in that organization’s Climate Risk and Real Estate Investment Decision-Making report. In response, companies are mapping physical risk both for their current portfolios and for potential acquisitions, engaging with local policymakers, diversifying portfolios and directly investing in property-mitigation measures when the cities cannot, says the report. “Factoring in climate risk is becoming the new normal for our industry,” said Walter.

But as the retail business enhances its environmental defenses, too many are still “a little too comfortable” in their thinking on the topic, given the alarming growth in violent, wildly fluctuating weather, according to Streetsense’s Smith. “We just aren’t doing enough.”

2019 ICSC.

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