Credit: Adobe StockBeyond Property Damage: The Hidden Costs of Climate Risk in Real Estate
From premiums to compliance costs, Climate X reveals the true financial toll of climate exposure in the property market
September 4, 2025Real Estate
Written by Cain Christoforou
Physical climate damage is now evident, including floods, storms, wildfires, and coastal erosion. However, the deeper risk lies beneath: hidden, compounding costs that erode performance over time.
Rising insurance premiums, compliance penalties, and tenant churn are inflating the total cost of ownership. Asset managers must rethink how they track and price climate risk, or risk facing valuation shocks, cash flow volatility, and stranded assets.
A Deloitte study reports that commercial building insurance premiums in the highest-risk US states (based on FEMA’s expected annual loss data) surged by 31% year-over-year, with costs nearly doubling over five years, slashing insurance affordability for many asset owners.
Swiss Re warns that escalating climate hazards - including extreme heat, intense precipitation, and wildfires - are increasingly disrupting critical infrastructure, such as power, water, and transportation systems. These disruptions are raising property-related business interruption costs globally, driving insurers to rethink underwriting models.
Key cost categories to track:
In the UK, a significant share of offices struggle with overheating during heatwaves, leading to reduced occupancy as tenants work remotely, a problem tied to underperforming EPC ratings and inadequate cooling infrastructure.
Meanwhile, rising insurance deductibles shifted risk back onto landlords, straining reserves and creating unpredictable expense swings. Without a forward-looking risk lens, this loss wouldn’t have been forecast in any capital plan.
How this impacts financials:
Adapt delivers high-resolution, asset-level climate risk data and financial cost modelling, helping real estate professionals understand how specific climate hazards - such as flooding, extreme heat, or rainfall - will impact a building’s long-term performance. Rather than relying on generic risk scores or slow third-party consultancies, Adapt enables self-service risk assessments and direct integration into financial workflows.
At its core, Adapt quantifies both physical climate risk and the projected cost of adaptation, allowing users to model how different climate scenarios will affect insurance affordability, potential losses, and resilience CapEx needs. These outputs are structured to feed directly into NOI forecasts, IRR models, and valuation analysis - helping managers understand how climate exposure could erode returns, impair cash flows, or require capital reinvestment.
Recently the UK’s Climate Change Committee reported to Parliament this year (2025) that 6.3 million homes and businesses are currently at flood risk, rising to 8 million (25% of all properties) by mid-century - highlighting escalating insurability, tenant demand, and cost volatility.
Solutions like Adapt enable asset managers to model these risks at the building level, quantifying how variables such as rising cooling degree days or stormwater exposure will affect future physical impacts and potential insurance premiums, and provide the optimal adaptation measure to engage for the best ROI.
What Adapt enables asset managers to do:
By bridging the gap between climate science and investment decision-making, Adapt empowers real estate managers to shift from reactive risk management to proactive value preservation - ensuring climate volatility is priced in before it becomes a loss line on the balance sheet.
But tools like Adapt allow managers to shift from reactive firefighting to proactive modelling. What’s next? Building resilience into the P&L - not just into the fabric of the building - will define the winners in tomorrow’s real estate market.
Cain Christoforou is Enterprise Account Executive at Climate X
Physical climate damage is now evident, including floods, storms, wildfires, and coastal erosion. However, the deeper risk lies beneath: hidden, compounding costs that erode performance over time.
Rising insurance premiums, compliance penalties, and tenant churn are inflating the total cost of ownership. Asset managers must rethink how they track and price climate risk, or risk facing valuation shocks, cash flow volatility, and stranded assets.
Breakdown of the hidden costs of climate risk: From insurance premiums to compliance and operational disruptions
Climate risk rarely arrives as a single catastrophic event. More often, it appears as unmodelled, compounding costs that quietly reshape CapEx and NOI over a 3 to 5 year horizon (based on a generalised planning assumption). These include insurance volatility, operational downtime, and regulatory compliance, all of which are rarely factored in upfront.A Deloitte study reports that commercial building insurance premiums in the highest-risk US states (based on FEMA’s expected annual loss data) surged by 31% year-over-year, with costs nearly doubling over five years, slashing insurance affordability for many asset owners.
Swiss Re warns that escalating climate hazards - including extreme heat, intense precipitation, and wildfires - are increasingly disrupting critical infrastructure, such as power, water, and transportation systems. These disruptions are raising property-related business interruption costs globally, driving insurers to rethink underwriting models.
Key cost categories to track:
- Operational: Business interruption, HVAC strain, maintenance surge after extreme weather
- Regulatory: ESG non-compliance fines, building code upgrades, disclosure burdens
- Insurance: Premium hikes, coverage retraction, higher deductibles, flood/fire exclusions
- Reputational: Lower tenant retention, ESG downgrades, reduced investor appetite
How climate risks affect cash flow and long-term returns
Ignoring hidden climate costs doesn’t eliminate them, it simply delays their impact on cash flow and asset performance. Over time, rising operating expenses and tightening insurance terms reduce net operating income and distort internal rate of return projections.In the UK, a significant share of offices struggle with overheating during heatwaves, leading to reduced occupancy as tenants work remotely, a problem tied to underperforming EPC ratings and inadequate cooling infrastructure.
Meanwhile, rising insurance deductibles shifted risk back onto landlords, straining reserves and creating unpredictable expense swings. Without a forward-looking risk lens, this loss wouldn’t have been forecast in any capital plan.
How this impacts financials:
- NOI erosion from unplanned OpEx and vacancy-driven rent gaps
- IRR dilution from delayed cash flows, compliance CapEx, and reputational cost drag
- Debt risk from inability to service loans during weather-related downtime
- Uncertainty in underwriting lowers asset competitiveness and raises cost of capital
Physical damage is only one line on the balance sheet. The true risk of climate change lies in its quiet, relentless cost creep. (Wikimedia Commons)
How tools like Adapt quantify and manage the hidden costs of climate risk
Traditional real estate underwriting often overlooks the creeping financial effects of climate change - not just physical damage, but the broader costs of disruption, adaptation, and regulatory exposure. Adapt, Climate X’s solution for real estate, was built to close that gap.Adapt delivers high-resolution, asset-level climate risk data and financial cost modelling, helping real estate professionals understand how specific climate hazards - such as flooding, extreme heat, or rainfall - will impact a building’s long-term performance. Rather than relying on generic risk scores or slow third-party consultancies, Adapt enables self-service risk assessments and direct integration into financial workflows.
At its core, Adapt quantifies both physical climate risk and the projected cost of adaptation, allowing users to model how different climate scenarios will affect insurance affordability, potential losses, and resilience CapEx needs. These outputs are structured to feed directly into NOI forecasts, IRR models, and valuation analysis - helping managers understand how climate exposure could erode returns, impair cash flows, or require capital reinvestment.
Recently the UK’s Climate Change Committee reported to Parliament this year (2025) that 6.3 million homes and businesses are currently at flood risk, rising to 8 million (25% of all properties) by mid-century - highlighting escalating insurability, tenant demand, and cost volatility.
Solutions like Adapt enable asset managers to model these risks at the building level, quantifying how variables such as rising cooling degree days or stormwater exposure will affect future physical impacts and potential insurance premiums, and provide the optimal adaptation measure to engage for the best ROI.
What Adapt enables asset managers to do:
- Model location-specific hazard exposure - including flood, heat, and wind - at the building level, across multiple time horizons and emissions scenarios (Using Climate X Spectra)
- Estimate financial loss from future climate events, and evaluate the ROI of resilience upgrades to reduce those losses.
- Simulate CapEx needs for adaptation and map them into financial plans and risk-adjusted return models.
- Integrate climate-adjusted assumptions into underwriting, hold/sell analysis, and loan servicing risk assessments.
By bridging the gap between climate science and investment decision-making, Adapt empowers real estate managers to shift from reactive risk management to proactive value preservation - ensuring climate volatility is priced in before it becomes a loss line on the balance sheet.
Conclusion
Physical damage is only one line on the balance sheet. The true risk of climate change lies in its quiet, relentless cost creep: insurance, downtime, compliance, churn. Without forward planning, these risks accumulate and erode asset value from the inside out.But tools like Adapt allow managers to shift from reactive firefighting to proactive modelling. What’s next? Building resilience into the P&L - not just into the fabric of the building - will define the winners in tomorrow’s real estate market.
Cain Christoforou is Enterprise Account Executive at Climate X