As communities brace for another summer of extreme weather, many home and building owners are taking a closer look at how exposed these assets are to climate risks. When it comes time for their next insurance or mortgage renewal, or when they decide to sell, they may be asking: how will last July’s hailstorm affect my costs and options?
Severe weather events are reshaping the real estate market in Canada. As hailstorms, wildfires, flooding, and high-speed wind events become more frequent and severe, real estate and insurance markets are increasingly recognizing these risks and their impacts on building’s values.
What is the difference between resilient and conventional buildings?
A resilient building is one that has been hardened against climate impacts. Enhanced resilience can come in the form of hail-resistant roofing, increased ventilation and cooling measures, as well as flooding and wildfire mitigation measures. The value these measures contribute to newly constructed or retrofitted buildings is often referred to as the green premium. Conventional buildings constructed to minimum standards and that do not incorporate these resiliency measures, on the other hand, are increasingly exposed to the brown discount. Compared to conventional buildings, more resilient buildings benefit from increased property valuations, and lower insurance costs and operating expenses.
How are insurance companies dealing with extreme weather risks?
Today, insurance markets are one of the clearest early signals of how extreme weather risk is changing the cost of building ownership. Canada-wide, TD Economics has observed rises in home insurance costs and deductibles, and reduced coverage. The problem is heightened in Alberta, having experienced five catastrophic events exceeding $1 billion each since 2013, including major floods, wildfires, and hailstorms.
We are also seeing insurers sound the alarm through public pressure. In April, Intact Financial, TD Insurance, Wawanesa, and Definity Financial called on the federal government to ensure new residential construction buildings are hardened against severe weather risks. For existing building owners considering retrofits, or those planning to construct new buildings without considering resilience, this is a warning.
What does the green premium mean?
This premium is the reward early investors realize for taking steps to reduce their building’s climate exposure. Green premiums typically appear through increased property value, lower insurance costs, better lending terms, and stronger tenant retention – all of which improve the bottom line.
Building performance requirements are one way to capture these benefits. As Affine Climate Solutions’ publication on building certification illustrates, buildings constructed or retrofit to higher building performance standards outperform conventional buildings in terms of rents, occupancy, operating costs, and asset value.
There are policy tools available to help define the value of energy efficient and resilient buildings. For example, Energy Performance Certificates like those found in Europe. Energy Performance Certificates are mandatory and standardized assessments rating a building’s energy efficiency, costs, and emissions, often recommending improvements and upgrades. Without these important policy anchors in place, green premiums are left to rely on market-driven action, largely led by lenders that seek out and recognize sustainability metrics, and by insurers that use similar metrics to price their offerings. As these key market actors increasingly recognize the benefits of resilient buildings, conventional building owners risk greater exposure to the brown discount.
The role of green premiums is expected to diminish over time, as these premiums persist only while they remain outstanding in the market. Once resiliency becomes the market norm, green premiums may shrink. In the long run, the bigger financial benefit will be avoiding the brown discount.
What does the brown discount mean?
As rising insurance costs, weaker lending terms, lower tenant demand, and increasing energy costs persist, ever more building owners are exposed to a brown discount. As severe weather events become more frequent, the financial cost of this discount will get steeper.
The Quebec-based Décarbone+ published a recent white paper on emerging sustainable valuation practices. Through extensive engagement and academic research, they conclude that the real estate market relies on fragmented data and practices that fail to capture evolving risk dynamics. This creates challenges when assigning premiums to high performing buildings, and discounts to underperforming ones. Still, even with imperfect data and frameworks, current valuation practices indicate green premiums of +5 per cent and brown discounts at -11 per cent.
Moving the market by rewarding resilience
Home and building owners who invest in hardening their property to withstand extreme weather events are taking action that reduce costs for lenders, insurers and all orders of government. Strategic policy intervention can help ensure energy efficient and resilient building practices are rewarded with better valuation and lower operating income:
- Governments and regulators can use standards, benchmarks, and certifications for energy efficiency and climate resilience, along with clear timelines for implementation.
- Insurers can create products rewarding resilient buildings.
- Lenders and investors can request resilience-focused valuations in underwriting and appraisals.
These interventions reward early adopters and mitigate future discounts. Over time, the goal should be to make resilience a standard feature of building valuation and operation; for now, it is a niche premium.
The Pembina Institute acknowledges the generous support of the Alberta Ecotrust Foundation.
