Hi Reader,
Happy Spring! Or summer as I sit here writing this newsletter enjoying 98 degrees and sunshine.
I recently read an article that spiked my blood pressure, so I decided to use that as inspiration for this month’s newsletter. The topic? Physical climate risk in real estate valuations and why portions of the appraisal industry are still treating physical risk assessment as voluntary while the market, insurers, investors, and global valuation standards have already moved on.
Turns out, I have some thoughts on that.
As always, thank you for reading and thank you for sharing your feedback and comments. Keep them coming!
Voluntary Physical Risk Standards for Appraisals Are So 2020
Like many of you, I read plenty of articles and white papers where I either nod along in agreement or experience my blood pressure rising with each passing paragraph. Rarely do both happen at once.
A recent article in The Appraisal Journal on physical weather risk in real estate valuation managed to do both.
To be fair, many things in our CRE industry are hard.
- Raising equity for development projects in the face of increasing construction costs, flattening rents, and rising operating costs.
- Retooling our workforce for an AI-enabled economy while still delivering results today.
- Navigating geopolitical instability and economic shocks while providing strong risk-adjusted returns to stakeholders.
- Delivering 21st century building performance with early 20th century infrastructure.
Updating appraisal standards to include physical risk assessment as part of real estate valuation is not one of them.
The governing and licensing organizations already exist. ASTM. The Appraisal Institute.
Yes, the Appraisal Institute as an organization is in turmoil. Their newsfeed is awash in allegations of sexual harassment, malfeasance, and mismanagement. And yes, dysfunction at that level makes updating standards and professional education challenging.
But the market is moving regardless.
The recent article in The Appraisal Journal, Considering the Physical Risk of Weather Events in Real Estate Valuation by Spenser J. Robinson thoughtfully lays out the case for including physical risk within valuation frameworks. My frustration is not with the argument. It is with the timeline.
We are in 2026 and the ASTM and Appraisal Institute still approach physical risk assessment as a voluntary exercise rather than a core component of valuation.
Voluntary physical risk assessment standards for valuations are so 2020.
Why does this matter? Why should you care? Because appraisals sit at the center of how real estate is financed, priced, reported, and traded. If physical climate risk is inconsistently assessed, then the risk profile is inconsistently priced.
Meanwhile, the global valuation standard from RICS already mandates physical climate risk assessments. This year marks the publication of the fourth edition of RICS, Professional Standard Global, ESG and sustainability in commercial property valuation.
The market, insurers, investors, and global valuation standards have already moved. Portions of the US appraisal industry are still debating how optional this should be.
No need for the appraisal industry, ASTM, and the Appraisal Institute to start from scratch. If they would like a template, they can begin with the first edition of the RICS standard published in 2021. Or the second. Or the third. Or now the fourth edition.
For a momentary jolt to your blood pressure, here are a few excerpts from the article:
- “The built environment continues to be impacted by risks linked to weather events, making them increasingly relevant to real estate markets and, by extension, to the valuation process.”
- “However, appraisals—especially those performed for transactional, financial reporting, or lending purposes—face uncertainty about how to treat physical risk within the framework of existing valuation methods.”
- “The appraisal profession assesses whether risks are being recognized and priced in the market.”
- “Still, much of the responsibility lies with individual [appraisal] professionals.”
The answer is yes; physical risk is being priced in the market. The insurance market has already repriced risk. Investors are repricing risk. Regulators are repricing risk. Global valuation standards are adapting to assess risk.
The question is not whether physical climate risk impacts value.
The question is why portions of the valuation industry are still treating that physical risk assessment as voluntary.
One of the more striking points from the article references studies identifying pricing discounts for properties located in high-risk flood zones, particularly where disclosure requirements exist and buyers are more aware of the risks.
Again, the market is already speaking.
This is not a future issue. It is an operating condition.
And as we continue to experience record-setting billion-dollar weather disasters, the disconnect between market reality and valuation standards becomes increasingly difficult to justify.
Physical climate risk is no longer a niche ESG conversation. It is table stakes risk assessment that impacts valuations.
The valuation industry can either standardize how it measures that risk now, or continue allowing insurers, lenders, investors, and regulators to define the market without it.
Either way, the market is moving.
While we wait for portions of the appraisal industry to catch up, remember that this still comes down to caveat emptor and risk-reward analysis. Buyer beware and get informed.
Appraisals provide one layer of information about a real estate investment. They are not the only layer. And sophisticated market participants already know to ask deeper questions about physical risk exposure.
My two cents: If the proposals you requested from the (minimum of three) appraisal firms do not include physical risk assessments, revise your baseline appraisal services RFP, and ask the firms to resubmit with those requirements included.
Because we both know that just because physical risk is not consistently reflected in appraisals today does not mean your next buyer, lender, or insurer is ignoring it.
The insurance market already answered the physical risk question years ago.