Cities under stress: Building and investing in a warming climate

Mertens: I joined PIMCO Prime Real Estate in 2015, after working in real estate within Allianz Investment Management. Two decades ago, climate wasn’t on the radar. That changed first, in 2018, when we started to develop our sustainability framework in response to the Allianz mandate to decarbonize its real estate portfolio, and, second, in 2020, with the launch of ACCRiS, Allianz’s climate and natural-catastrophe screening tool for risks like flood, wind and heat.

The old mindset was, “If it’s insured, it’s safe.” But real estate is long-term and tied to place, while insurance renews annually. We now plan for more frequent, more intense events over longer horizons — especially heavy rain — where modeled “return periods” often understate what we’re seeing.

Mertens: We run every building through two tools — ACCRiS and Jupiter Intelligence — to see how it could be hit by climate hazards today and under future scenarios. We screen for flooding (from rain, rivers and the coast), hail, wind, heat and cold. Prior to any upgrade program, most assets score low to medium on heat resilience; we would then target that any capital expenditure boosts comfort and cuts energy bills. Models sometimes flag a big ‘cold risk,’ but in real life our heating systems keep that in check. Flooding is still the No. 1 source of physical damage.

Mertens: We start by cutting demand before adding more machines. First, we aim to keep heat out through external shading, better glazing and a tighter, better-insulated envelope. Next, we move air smartly through the building with optimized ventilation. Then, any cooling needs to be efficient and with well-sealed windows and doors that prevent losses. Finally, we can run a smart building management system to respond to real-time weather and indoor air quality to smooth temperature swings and peak loads.

Once those basics are in place, we can consider larger upgrades. Greening the outside areas with more trees, pergolas and shaded seating can cool the microclimate and lift the tenant experience.

Mertens: One of our Milan assets, Corso Italia 23, is a good illustration. A few years ago, it was mostly asphalt and hard surfaces because they were “practical.” We’ve replaced hardscape with trees and planting and turned car courtyards into green courtyards. The result: less reflected heat on the facade, cooler ground-level conditions and better user comfort. It looks better, feels better and measurably improves the microclimate.

Mertens: We track the meters and the people. On comfort, we watch whether indoor temperatures stay within our target band through the day and whether the comfort score trends toward “neutral.” On energy, we track cooling kilowatt-hours per square meter and normalize it by cooling degree days, so a mild week doesn’t fake a win. During heat waves, we watch peak demand — success is a flatter, lower curve, not sharp spikes.

On the human side, fewer heat-related service calls, higher tenant satisfaction (NPS) and steady occupancy and renewals tell us the upgrades are working. When peaks flatten, normalized cooling use drops and complaints fall, we know we’ve moved the needle.

Mertens: We’re watching the trend, but in our urban locations we haven’t seen acute portfolio impacts so far. If we do, we’ll tackle them through refurbishments or full redevelopments, where we can investigate properly and fix the root cause.

Mertens: Yes. There are parts of the world where insurance coverage has become scarce or unaffordable for residential assets, for example in Florida. Essentially, if you can’t insure it, you shouldn’t own it.

Mertens: We’re in the process of piloting a system of modular heat-exchange panels installed in underground parking garages. In summer, the panels pull heat from the building into the ground; in winter, they draw gentle heat back to help warm the building. Using the stable subsoil as a heat source and sink cuts energy use and reduces the need for fossil-fuel backup. It is still early days in the pilot, but the approach is encouraging.

Mertens: It’s a shared job. Owners need to fix their assets, but cities must shape the urban fabric to remain attractive to residents — trees, shade, water and surface materials. The best results come when municipalities set clear standards and work with owners through permitting. Coordination beats one-off fixes. If I had to name one example of a city doing things right, I’m always impressed by what I see in Paris. Their resources, planning and engagement with owners are impressive. Another example is Barcelona, where the city is working the building owners to introduce ‘climate shelters’ – public spaces within buildings or courtyards that offer people protection from extreme temperatures.

Mertens: Flooding and heavy rain remain the biggest source of potential physical damage. Historic flood maps are no longer a reliable guide, so we plan for extremes — think of the 300–400 L/m² cloudbursts seen in densely populated areas like Valencia: roughly two bathtubs of water per square metre over eight hours. If that hit Munich, you’d see chaos.

Extreme heat is different in that it rarely breaks buildings, but can have adverse health impacts. From a commercial perspective, it can reduce tenant comfort and drive up operating costs. That’s why our approach to building resilience manages both types of event: we account for outlier rain events with improved drainage, backflow protection and critical-equipment placement, and we reduce heat stress through envelope upgrades, shading, smart controls and greener courtyards so that within the buildings we manage the user wellbeing is taken care of. Floods set the floor for risk; heat sets the tone for day-to-day performance.