Physical climate risk is already cutting into real estate investment trust (REIT) revenues and could grow significantly worse without intervention, according to a report from First Street released Wednesday.

The analysis, which examined more than 45,000 properties held by 65 REITs across 61 countries, found that nearly all firms face some level of exposure to climate-driven losses tied to hazards such as flooding, wildfires and severe wind.

About 98% of REITs would experience revenue loss in a severe weather event occurring once every 100 years, the report said. More than half could see losses of at least 10%, while nearly one-third could lose more than 20% of annual revenue.

Jeremy Porter, chief economist at First Street, told HousingWire that the number will only increase — and the results will show up in company earnings reports and investor guidance. Climate-driven disruption costs the typical REIT approximately 1.1% of annual revenue, totaling an estimated $3.1 billion across the index.

That figure does not account for insurance, which is becoming more expensive and harder to obtain in higher-risk markets, leaving companies to change their approach instead of relying on traditional insurance policies.

Porter said that some REITs are “self-insuring,” meaning they set aside their reserves to cover potential losses rather than paying premiums to an insurer.

Broad but uneven exposure

The financial impact escalates sharply in extreme scenarios. A 1-in-100-year event would result in average losses of about 15% of annual revenue, while rarer 1-in-500-year events could push losses close to 30%, the report found. Across the index, a 1-in-100-year event would translate to about $43 billion in total losses.

“An investment in real estate is, at its core, a geographic commitment,” the report said, noting that unlike other asset classes, properties cannot be relocated to avoid risk.

Climate exposure is widespread but uneven, with a subset of REITs facing disproportionately high risk due to geographic concentration or asset mix. The report found that while most firms fall into a moderate risk category, a smaller group faces significantly higher potential losses — a disparity that broad market averages tend to obscure.

The U.S. dominates global REIT portfolios, accounting for more than 80% of asset locations and roughly two-thirds of rentable square footage. Many of the most heavily invested markets — including parts of California, Texas and Florida — also rank among the most exposed to climate hazards.

“We know that real estate is concentrated in your Miamis and your New Yorks and your Houstons — and, you know, some areas that we know have high levels of physical climate risk — but the markets that are still driving up prices and still producing returns that investors are looking for,” Porter said.

“I think as long as investors are watching places that are disproportionately at risk of physical climate risk, they’re there. They are likely to start to respond to risks more frequently in the future, but we’re already seeing them respond to actual exposure.”

Need for granular data

Wildfire currently represents the most severe financial risk due to its potential to destroy assets and disrupt operations for extended periods. Flooding contributes through frequency and geographic reach, while increasing wind intensity is expected to become the primary driver of future losses.

Looking ahead, the report projects that annual expected losses will rise more than 15% by 2056 under a midrange climate scenario if portfolios remain unchanged. In that case, average losses in a 1-in-100-year event would climb to about 18.5% of annual revenue.

“We know climate disasters are going to become more frequent. Even if we all stopped putting carbon in the air today, that wouldn’t change,” Porter said. “There’s just this momentum that’s going to take us out the next few decades so we know what’s coming.

“I think being aware, having the data, understanding that climate risk is material — but it’s not the end-all, be-all of your investment decision process — and just figuring out how to layer it into what you already know you are. You’re already looking at market investability, you’re already looking at demographics, you’re already looking at geopolitical risk. All these other indicators are really important. There is a piece that we’re missing in a lot of spaces, which is physical climate risk.”

The findings underscore a growing need for more granular risk analysis, particularly at the asset level, rather than relying on broad sector metrics or environmental, social and governance (ESG) scores, the report said.

First Street also found that REITs already incorporating forward-looking climate data into their investment decisions tend to have lower modeled exposure. These firms had nearly 7 percentage points less revenue at risk in severe weather scenarios compared to peers, although the report cautioned that the relationship is not necessarily causal.

“Over the last five, six or seven years or so, we’ve actually seen quite a bit of increasing sophistication and awareness around physical climate risk, but I still think it’s lagging,” Porter said. “I still think we’re at the very early stages of figuring out how to actually price it into equities and how investors may use that information in their decision-making processes.”