Demographic detail: How climate and population flows are impacting US real estate

Population movements are, in our view, a critical and often under-appreciated driver of potential relative real estate returns.

The Covid-19 pandemic and the associated acceleration in working from home benefited Sunbelt markets at the expense of coastal Gateways. While the near-term prospects for employment growth in Sunbelt markets remain strong, over the longer term we expect this relative strength to moderate, with climate risk an increasingly important factor.

Recent extreme weather events are a stark reminder of the potential physical impacts of climate change, but of equal importance, in our view, are the chronic physical climate risks that negatively impact the liveability of certain markets. We believe these could hurt the long-term attractiveness of some Sunbelt markets and provide potential upside for a few more resilient non-Sunbelt markets, necessitating more nuance around location selection for long-term investors, with implications for cap rates.

In our view, real estate and infrastructure assets in higher climate risk areas will increasingly have to contend with the additional capex required for adaptation, the loss of revenues from operational disruptions and higher insurance premiums. Heightened climate-associated risks and costs could exacerbate existing supply constraints in residential markets. Extending the useful life of existing supply, through retrofitting and decarbonisation strategies, will be increasingly important in addressing local supply and demand imbalances, in our view.

Read more on how climate and population flows are impacting the US real estate sector here.