The historic drought and warmer temperatures are stoking fears of an early wildfire season. Areas in the state scorched by wildfires increased fivefold from 1979 to 2019. The following year, the burn area more than doubled.
And a new United Nations report warns of a “global wildfire crisis” and predicts that extreme wildfires could increase by 57% by the end of the century.
With fire comes the threat of property loss for homeowners.
A team of Berkeley Haas researchers warn that despite this clear upward trajectory, the risks posed by wildfires are worse than we—or, at least, the insurance and mortgage markets— are willing to account for.
An analysis by Professors Nancy Wallace and Richard Stanton, along with two PhD alumni, suggests the financial firms whose insurance products help protect homeowners from the financial devastation of fires could soon find their own businesses financially wrecked, unless their risk models and pricing (and the government regulations overseeing both) undergo dramatic changes.
“We have a problem, and the political will to deal with this is not even trying to catch up with the speed of the rapidly changing risks,” says Wallace, the Lisle and Roslyn Payne Chair in Real Estate and Capital Markets, chair of the Berkeley Haas Real Estate Group, and co-chair of the Fisher Center for Real Estate and Urban Economics.
Wallace and Stanton, along with Paulo Issler, PhD 13, MBA 98, director of the Haas Real Estate & Financial Markets Lab, and Carles Vergara-Alert, MFE 04, PhD 08, now a professor at Spain’s IESE Business School, teamed up with physicists from the Lawrence Berkeley National Laboratory (LBNL) who study the fluid dynamics of fire. In a unique collaboration, they linked the physicists’ sophisticated measurement models—using satellite and radar data—to the comprehensive Fisher Center for Real Estate and Urban Economics’ real estate and mortgage-record data. This allowed them to forecast the risks posed by wildfires to lenders and insurers in California.
The researchers found that their site-specific estimates of wildfire risk in the state were quite different from the risk maps developed by the California Department of Insurance. This difference was most pronounced in the zones marked “zero-risk” on the state’s maps, because the researchers found that there was some level of risk in many of those places.
Separately, the researchers found that neighborhoods damaged by wildfires tend to return as gentrified—populated by larger and more expensive homes and residents with higher wealth than those outside of the burn area. That’s because the insurance industry incentivizes bigger and more expensive rebuilds, they noted.
But the system is not sustainable.
Mapping dynamic risks
As economists focused on the mortgage market, Wallace says the researchers are accustomed to working with static maps, which are “imperfect measures of the physical space because they’re so infrequently updated.”
The granular, digitized measurements over a 1.5-by-1.5 kilometer grid developed by the LBNL physicists are, on the other hand, based on dynamic hourly data. They incorporate information about the locations of thousands of California wildfires between 2000 and 2015, as well as meteorological factors including direction and speed of wind, humidity levels, and temperatures. The Haas team also considered a location’s slope, elevation, and vegetative density.
The Haas team mapped the owner-occupied, single-family residences included in a database that covers properties in California between 2000 and 2018. Their dataset included information about each property’s size and price, as well as household characteristics like wealth, income, and mortgage performance.
Building back bigger
The models they developed suggest that wildfire risk in California is more dispersed than the state’s static maps suggest. In fact, they found that important risks to housing stock falls into what the state labels as “zero-risk” zones which contain large numbers of single-family homes. In contrast, their predictive models estimate there is some risk of wildfire in most of these areas.
They also show that five years after a fire, the rebuilt houses are larger and more expensive than those outside of the burn area. Five years later, the houses in the post-fire areas have 3.4% higher prices and are larger than those outside the burn area. This is partly because new homes are required to be built to code, which often means improvements in safety and quality over the previous housing stock. Insurance payouts enable owners to invest heavily in a rebuild, and because everyone in the area is doing the same thing, the whole area increases in value.
Of course, these incentives rely on the existence of a healthy property insurance industry. And that, the researchers say, may be threatened by the patterns highlighted by their predictive models.
From deterministic to probabilistic
Insurers are canceling policies at a growing clip. In the past three years, there’s been a 31% increase in policy cancellations, Stanton says. In 2020 and 2021, he adds, California insurers lost nearly two years of premia. “They can’t sustain providing insurance in this state unless there’s a policy response,” he says.
The problem, the researchers argue, is that the insurers are relying on deterministic models of wildfire risk, based on where fires have happened, rather than probabilistic models that predict incidence of fires. The insurers have no choice—the California Department of Insurance (CDI) requires them to price based on deterministic maps. The researchers argue that the CDI policy needs to change so insurers can base their risk and pricing on probabilistic models.
California regulators also prohibit insurers from using reinsurance margins in the rate structure, which is insurance to cover tail risks—in other words, extreme events. In recent years insurers that offer financial protection from hurricanes and earthquakes have been relying on the reinsurance market. Introducing reinsurance would likely raise customers’ premia, so the researchers propose that the solution could involve subsidies for people who can’t afford the price hikes. The new structure should also shift the current incentives.
“If insurance products really reflected the risk, it would be much more costly, and homebuyers would have a decision to make,” Wallace says. “‘Do I want this home enough to pay these premia, and to take this risk with my life?’ Right now, the real risk isn’t priced in accurately enough for people to understand what their exposures are.”
Wallace has personal experience with those trade-offs: She was one of thousands of people who fled the 1991 Oakland Hills Firestorm 30 years ago, which killed 25 people, injured about 150, and burned 2,900 homes.
As climate change continues to take its toll, the structure of the insurance market will have to change. That may mean a shift from today’s indemnified insurance, which carefully covers losses, to what’s called parametric insurance, which pays out based on the occurrence and magnitude of a specific weather event.
New Chancellor’s Chair celebrates Ken Rosen
Anyone familiar with Haas’ real estate program knows the name Kenneth Rosen. A professor emeritus and chairman of real estate market research firm Rosen Consulting Group, he’s revered for his long-running real estate and economic forecasts. He’s also chairman of the Fisher Center for Real Estate & Urban Economics and is directly responsible for the Center’s revitalization starting in the ’80s—which led to Haas’ recognition today as one of the nation’s leading real estate programs.
To honor Rosen’s immeasurable legacy—and to maintain the program’s strong reputation—a group of donors has given $1 million each to establish the Kenneth T. Rosen Chancellor’s Chair in Real Estate.
The Chancellor’s Chair represents a new model for UC Berkeley, one designed both to retain outstanding faculty and to attract new talent. Part of the money will support a professor’s research, teaching, and academic initiatives. The remaining money will fund a new full-time real estate faculty member.
Donor Kevin Shields, BS 82, MBA/JD 85, attests to the importance of faculty in drawing students. “The reason I decided to get an MBA was the opportunity to study under Ken,” says Shields, chairman and CEO of Griffin Capital. “He became my mentor and had a profound effect on the trajectory of my career.”
Lecturer Bill Falik, also a donor to the Chair, illustrates the investment faculty make in the success of students. Under his tutelage, Haas teams have won three of the last four UT Austin Real Estate Challenges—a premier case-based competition for 20 top-ranked business schools—despite having a smaller faculty than virtually all the competitor schools. “Haas could well have the best real estate training of any business school in the country,” he says. “Hiring additional faculty would help continue that success.”
The Fisher Center was one of the first real estate and urban economics programs nationwide when founded in 1948 by Paul Wendt and Sherman Maisel. Maisel hired Rosen in 1979, who in turn expanded the Center by hiring the late professor Dwight Jaffee and professors Bob Edelstein and Nancy Wallace.
The Chair will also support the innovation that’s a hallmark of the program. The real estate curriculum, for example, has recently been reshaped to focus on sustainability amid climate change.
The donors to the Chair have all been involved with the Policy Advisory Board, a group of academics, policy makers, and business leaders Rosen established to transform real estate at Haas into an interdisciplinary center not reliant on state funding. Their willingness to establish the Chair reflects the strong alliances Rosen created in service to real estate at Haas.
The donors include: Shields and his wife, Eileen; Falik and his wife, Diana Cohen; George and Judy Marcus; Ken and Donna Coit; the Fisher Family in honor of Don, BS 50, and Doris Fisher; Dan, BA 89 (political science), and Jaclyn Safier; and an anonymous donor.
Why Black and Latino homeowners profit less than whites
In the U.S., Black home ownership rates doubled from about 23% in 1920 to 45% in 2021. Yet the median white U.S. household still holds about 10 times the wealth of the median Black household, and this massive wealth gap has barely budged.
Associate Professor Amir Kermani and a colleague analyzed massive datasets capturing 6 million home ownership spells from 1990 to 2017 to better understand why the wealth gap is so persistent.
They found that Black and Latino homeowners across all income levels make significantly lower returns on owning a home than whites, on average: 44% and 22% lower, respectively, when compounding the average of all types of sales over ten years. But surprisingly, it’s not because of differences in prices or appreciation rates in their neighborhoods.
In fact, when it comes to regular home sales, minority sellers profit about as much on average as whites—regardless of the racial makeup of the neighborhood. Almost all of the disparity is driven by higher rates of distressed sales among Blacks and Latinos, which wipe out a huge chunk of potential wealth and drive down average returns.
Minority homeowners are 5% more likely to experience a distressed sale—which includes foreclosures and short sales, where a lender forces a sale for the mortgage balance. They are also more likely to live in neighborhoods where forced sales carry a steeper price discount, probably because there are fewer buyers, Kermani says.
“Higher job instability and fewer liquid assets make people very vulnerable to a temporary shock and increase the chances of losing all the wealth they’ve accumulated in their house.”
“If we could equalize the rate of return on homeownership for Blacks and whites—without any increase in home ownership—we would reduce the Black/white housing wealth gap by about 40% at retirement,” says Kermani. “If we were able to equalize both home purchases and the rate of return on ownership, we’d reduce the gap by 50%.”
But why are those in minority groups more likely to lose their homes in forced sales? The study identifies deep-seated disparities in liquid wealth, especially after age 50, and job instability as the culprits. Blacks and Latinos are much more likely to lose their jobs than whites—across all sectors, education levels, geographic locations, and income levels.
“Even Black households with income over $100,000 are still about 5% more likely to experience a layoff,” Kermani says. “Higher job instability and fewer liquid assets make people very vulnerable to a temporary shock and increase the chances of losing all the wealth they’ve accumulated in their house.”
The main problem seems to be rooted in the labor market, and the main fix is to create more stable jobs and ways to build liquid assets, says Kermani. “But in the short term, one solution is more flexible mortgage contracts and more mortgage modifications,” he says.
He estimates that receiving a modification after three months of failing to make mortgage payments can reduce chances of a foreclosure by 37 percentage points and increase a homeowner’s average annual returns by nearly 9 percentage points.
Noni Ramos may be a relatively new CEO, but she’s a seasoned professional in the affordable housing field.
Having spent almost three decades working nationally to combat the housing crisis, she now focuses on the Bay Area’s thirteen counties as head of Housing Trust Silicon Valley, where she endeavors to keep people in their homes, add more housing, and ensure available housing is affordable.
A Bay Area native, it’s a role with particular personal resonance. “I grew up in affordable housing,” Ramos says. “I have firsthand experience of the life-altering impact that can have not only on an individual but on generations to come. My children have the life and the opportunities they have because I had those opportunities.”
Ramos, a woman of color and first-generation college graduate, also understands the diversity and interconnectivity of local communities. This perspective motivates her collaboration with private organizations and the public sector to create programs that span the Bay Area’s income gamut. “We need housing for all income levels, of all types,” she says. “And we need that housing to be built in different places, not just in one part of the community.”
She explains how connecting residents to other support services, like Spanish-language materials and mental health and medical resources, is paramount to fully include, support, and develop communities—a fact made especially clear during the pandemic.
It’s work that Ramos approaches with a strong sense of responsibility. “I hope to be a role model in ways that other folks were role models for me and supported me,” she says.
A team of Berkeley Haas MBA students won the 2022 University of North Carolina Kenan-Flagler Business School Real Estate Development Challenge for a plan to transform part of an historic Washington D.C. neighborhood.
“It’s great to bring this home for Haas and for Berkeley,” said Timothy Werby, MBA/JD 22, whose teammates included Vicky Li, Alijah Talley, and Santiago Recabarren, all MBA 23. Haas last won the competition in 2011.
The UNC Real Estate Development Challenge,hosted annually by the Leonard W. Wood Center for Real Estate Studies at Kenan-Flagler, convened 12 teams from the country’s top MBA programs on February 18.
This year, the teams had to plan, design, model financials, and create an investor presentation for development of a 9.25-acre site in Washington D.C.’s Anacostia neighborhood, south of the U.S. Capitol Building. To be successful, plans had to incorporate “the highest level of sustainability, embrace the surrounding neighborhoods, and deliver attractive risk-adjusted returns to investors.”
Focused on the community
Split across four presentation rooms, each team presented to a group of local real estate experts in 20-minute rounds, followed by five minutes of questions from the judges. Four finalists were then selected to present again in front of all of the judges, UNC students, and other competitors.
The Haas team’s presentation was designed thematically around the Nacotchtank, or Anacostans, an Algonquian-speaking, indigenous people who lived along the southeast side of the Anacostia River. Their design included a circular plaza to host pop-up farmer’s markets, an outdoor event space to be called the Frederick Douglass Pavilion, a new neighborhood grocery store, renovated school space, and a jazz stage that could be used for outdoor block parties and community events.
The team also pushed to include new multi-family housing and additional community spaces in future phases, including 43% more affordable housing units than was required.
“We all had our superpower”
Recabarren said the team excelled in part because it covered the project’s central issues comprehensively.
“We decided to pay more attention to the conceptual aspects of the project, which we defined as the four core values of our development: honoring local culture, health and wellness, sustainability, equity and inclusion,” he said.
The team had just four days to develop the whole project. “We were very fortunate to have Tim, who had a lot of experience in these competitions,” Recabarren said. “He convinced us on where and how we should use our resources.”
Talley said the team’s power was in its diversity, which enabled team members to tap into each of their strengths.
“Each of my teammates have different professional backgrounds, varied levels of real estate experience, and different lived experiences,” he said. “I think that we all had our own superpower and something tangible to bring to the table.”
Finally, Li said that the team was highly motivated to “do what it takes to take home the grand prize.
Vanderbilt’s Owen Graduate School of Management took second place while Rice University’s Business School and Dartmouth’s Tuck School of Business tied for third place.
Don’t be surprised if inflation, which hit a 40-year high of 7.5% in January, spikes even higher over the next few months as the U.S. government’s massive response to the coronavirus pandemic continues to ripple through the economy.
Inflation will likely ease in the second half of the year, but a drop to pre-pandemic levels is not in sight yet, according to a pair of economists who shared their outlook for 2022 and beyond at a virtual conference hosted by the Fisher Center for Real Estate and Urban Economics at UC Berkeley’s Haas School of Business this week.
“We way overdid it” with monetary and economic stimulus, said Kenneth Rosen, chair of the Fisher Center and a Berkeley Haas professor emeritus. He gave Congress credit for crafting emergency programs—such as enhanced unemployment, stimulus payments and Paycheck Protection Program loans—in 2020, but “I do think the stimulus in 2021 probably was unnecessary and should have been more targeted.”
Once the economy began to reopen, those stimulus programs quickly boosted demand for goods, while manufacturing, transportation and labor-force disruptions constrained supplies. The upshot: Inflation hit 7% in December and 7.5% in January, the highest since February 1982. Rosen said the “slow-moving” Federal Reserve waited too long to curb skyrocketing inflation by raising interest rates.
Inflation could hit 9%
That will change this year, when the Fed finally starts raising rates and fiscal stimulus begins to wear off, said Rosen and co-panelist Richard Barkham, global chief economist with CBRE.
Rosen sees inflation hitting 8% to 9% in a few months, before falling to 4 to 5% by year end. Chief executives he has spoken with recently said they are raising prices. They have labor problems and “don’t think it’s going to end quickly.”
Co-panelist Richard Barkham, global chief economist with CBRE, thinks inflation will peak at 9% in the first half of the year and drop to 3% to 4% by year end as kinks in the supply chain ease up and the reopening of schools and day care facilities let more people re-enter the workforce. But inflation will be “higher and more messy than people currently expect.”
Both economists expect the Fed will raise the short-term federal funds rate, now at 0.25%, by a quarter point four or five times this year. Barkham sees two more hikes next year, Rosen sees four.
Inflation will fall, but not to target rate
The two experts also agreed that after the transitory effects of the pandemic wear off, inflation will fall—but not to the Fed’s 2% target rate because the aging population and immigration constraints will keep an upward pressure on wages. A shift away from fossil fuels along with super-tight labor markets could also keep energy prices a bit higher, Barkham said.
Rosen said the U.S. economy will likely grow 3.5% to 4% this year as international tourism, conventions, and other sectors reopen. Also, individuals and businesses still have about half of the $5 trillion in fiscal stimulus doled out since 2020 sitting idle. Much of that will be spent this year and next, Rosen and Barkham agreed.
Immigration constraints will curb growth
Longer term, neither economist sees growth exceeding 2% annually unless the government bolsters immigration.
“Immigration and inter-regional migration was always the secret weapon of the U.S. economy,” said Barkham, who is a British citizen working in Boston. But legal and illegal immigration have fallen drastically in recent years, due to policies enacted during the Trump administration and Covid-related travel restrictions.
The United States should promote immigration, “but also be more aware of the actual and perceived distributional effects on income groups that have done poorly in the era of globalization,” Barkham said, noting that it’s tricky to put into practice. “I’m not particularly optimistic that we will see that increase in immigration” in the near and medium term. That means economic growth will have to come almost entirely from productivity gains, he said.
Rosen called immigration “the number one thing we can do” to promote long-term economic growth.
As for the stock and bond markets, expect more gyrations. Rising interest rates “will cause indigestion in the financial markets,” Rosen said.
More pain in 2023
Barkham said the real pain may not hit until 2023. Even if you had six rate hikes in 2022, “you still end the year with negative real interest rates,” which means short-term rates will be lower than the inflation rate. Real rates drive the economy and real estate markets, he said, and while they won’t be as deeply negative as they are now, “they will still support higher asset values.”
But by 2023, real interest rates will turn positive, and recent history has shown the U.S. is not very tolerant of them. When rates rose in 2018, there were “two big stock market hiccups,” Barkham said. “The Fed doesn’t want a major correction, but a certain amount of chop is all part of the process of moving out of these emergency policy settings.”
New research has found Black and Latino homeowners make significantly lower returns on buying a home than whites, on average. But surprisingly, it’s not because of differences in home prices or appreciation rates in their neighborhoods.
In fact, when it comes to regular home sales, minority sellers realize about the same returns on average as whites. The study found instead that almost all of the disparity is driven by higher rates of foreclosures and other distressed home sales among Blacks and Latinos, which wipes out a huge chunk of potential wealth and lowers average returns.
“Most of us think of home ownership as an excellent way to build wealth, so I think it’s natural for politicians and policymakers to believe that the best way to reduce the wealth gap is to promote home ownership among minorities,” said Berkeley Haas Assoc. Prof. Amir Kermani, study co-author. “What’s striking is that we found that equalizing rates of first-time home ownership would have almost no effect on the housing wealth gap, whereas helping people keep their homes would make a huge difference.”
The National Bureau of Economic Research (NBER) working paper, co-authored with Francis Wong of NBER, has important implications for housing policy, and also identifies the disturbing and deep-seated disparities in job stability and liquid wealth that underlie the higher foreclosure rates for Blacks and Latinos—even those with higher incomes.
The persistent wealth gap
In the United States, the median white household holds ten times the wealth of the median Black household. But although Black home ownership has increased from 23% in 1920 to 45% in 2021, the wealth gap has barely budged. Kermani was curious as to why decades of policies to increase homeownership hadn’t made more of a difference in closing the wealth gap.
He and Wong harnessed massive datasets linked together by the Fisher Center for Real Estate and Urban Economics, capturing 6 million home ownership spells from 1990 to 2017. The data includes Home Mortgage Disclosure Act records with self-reported race and ethnicity from loan applicants, real estate transaction records from data provider ATTOM; credit reports and loan-servicing data from Equifax-McDash; plus loan information from several other government and private sources. The study is the first to estimate the gap in returns on home ownership for Blacks and Latinos using data on individual transactions.
Across the housing market, discrimination has been well-documented, from redlining to unequal tax assessments to unfavorable loans and refinancing deals. And historically, minorities have often faced lower house price growth in their neighborhoods. That’s why Kermani was surprised to find that for regular home sales over the last two decades, average returns were very similar across racial groups—within neighborhoods with many minority homeowners and those that are primarily white. While some individual Black and Latino sellers sold their homes for much lower prices, gentrification pushed prices sky-high in other neighborhoods, bringing up the average.
Yet averaged across all types of sales annually, Black and Latino homeowners make 3.7 and 2.0 percentage points less than white homeowners, the researchers found. Compounded over ten years, that’s a 44% lower return for Blacks and 22% lower for Latinos. These disparities in returns on home investments exist across all income levels, even the richest one-third of minority homeowners. (The magnitude is greatest among lower-income and single-parent families.)
Averaged across all types of sales annually, Black and Latino homeowners make 3.7 and 2.0 percentage points less than white homeowners. Compounded over ten years, that’s a 44% lower return for Blacks and 22% lower for Latinos.
It’s among distressed sales where the chasm emerges. Distressed sales include foreclosures, where a borrower stops making payments on their mortgage and the lender sells the home to recover the balance, as well as short sales, where a lender forces the homeowner to sell for the outstanding mortgage balance.
Minority homeowners are 5% more likely to experience a distressed sale, and to live in neighborhoods where forced sales carry a steeper price discount, likely because there are fewer buyers, Kermani said. Distressed sales usually carry a price penalty, but even within distressed sales, Black and Latino homeowners make 3.8 and 2.7 percentage points lower returns than white homeowners, respectively.
“If we could equalize the rate of return on homeownership for Blacks and whites—without any increase in home ownership—we would reduce the Black/white housing wealth gap by about 40% at retirement,” said Kermani. “If we were able to equalize both home purchases and the rate of return on ownership, we’d reduce the gap by 50%.”
Less job security, fewer assets
So why are minorities so much more likely to lose their homes in forced sales? It’s not because they take on more debt to buy them, and although differences in income and overall wealth play a role, they’re not the primary driver, the study found. For Blacks in particular, the researchers found a huge gap in liquid assets—cash or its equivalent—that accelerates from age 50 on. They also found that Blacks and Latinos are much more likely to lose their jobs than whites, across all sectors, education levels, geographic locations, and income levels.
“That was what surprised me the most: Even Black households with income over a hundred thousand dollars are still about 5% more likely to experience a layoff,” Kermani said. “The combination of higher job instability and fewer liquid assets makes people very vulnerable to a temporary shock, and increases the chances of losing all the wealth they’ve accumulated in their house.”
The researchers found that controlling for liquid assets and income shocks explains one-third of the higher mortgage delinquency for Blacks, and nearly half the difference for Latinos. Kermani said he hopes to dig deeper into the causes of the layoff disparities in future research.
“What’s clear is that the main problem seems to be rooted in the labor market, and the main fix has to be creating more stable jobs and ways to build liquid assets,” he said. “But in the short term, one solution is more flexible mortgage contracts and more mortgage modifications.”
The researchers estimated that receiving a modification after three months of failing to make mortgage payments can reduce the likelihood of a foreclosure by 37 percentage points, and increase a homeowner’s average annual returns by nearly 9 percentage points.
Converting an office building into a life science center to lease to medical and biotech companies landed a team of Berkeley Haas MBA students a first place win at the 2021 UT Austin Real Estate Competition.
The competition was held Thursday, Nov. 18 and hosted by the University of Texas at Austin McCombs School of Business.
Team members include Carson Goldman, Andrew Johnson, Ian MacLean, Alex Dragten, all MBA 22, Fukang Peng, and Travis Kauzer, both EWMBA 22.
Haas bested 19 other teams from top U.S. business schools including Columbia, Yale, Wharton, NYU Stern, and University of Michigan’s Ross School of Business, and won $10,000 in prize money. This is Haas’ third first place win at this competition in the last four years.
MBA teams were tasked with creating a business plan for a building with a single tenant whose lease was about to expire. They had to consider maximizing risk-adjusted returns and demonstrate an understanding of macroeconomic trends, including the effects of inflation and the COVID-19 pandemic.
The Haas MBA team decided to convert the building into a life science center to attract multiple tenants and maximize high returns.
Team lead Carson Goldman credited the team’s win to practicing case presentations every week this semester and to work they did with their faculty advisors.
“Our coaches Bill Falik and Abby Franklin provided constant feedback and guidance and were wholly committed to this competition,” Goldman said. “Our alumni were just as important as they had volunteered weekly to judge our practice cases and offer constructive criticism,” he added.
“It’s very gratifying to see our students progress over the semester and to win first place,” said Haas Lecturer Bill Falik. “We’ve had victories, but to win first place in three out of the four years at this national competition–this has never been done before.”
This month marks the 30th anniversary of the start of the Oakland Hills firestorm, which occurred on the hillsides of northern Oakland and southeastern Berkeley, California, over the weekend of October 19–20, 1991.
Thirty years ago, Professor Nancy Wallace and her husband scrambled into their car with their family cat and a few belongings and fled for their lives as the Oakland Hills Firestorm roared through their neighborhood. The heat from the fire, fueled by dry pine needles and the Diablo winds, was so intense that within an hour almost 800 buildings were in flames.
“By the time we drove out, we were already encircled by fire and couldn’t go down the hill, but there were zero police or fire trucks on the scene. At the top of our street, I wanted to go right and my husband wanted to go left, and unfortunately I won,” said Wallace, who was at the time a new assistant professor with a six-year-old son, who luckily had stayed over at a friend’s house. “That’s when a car came speeding out and said if you go one inch farther, you’re going to die. Tom had to turn around on the rooftop garage of a house engulfed in flames…There were people ahead of us on motorcycles who were on fire. That’s not something you ever want to see.”
They made it out, but 25 people died, about 150 were injured, and about 2,900 homes were burned in California’s third deadliest wildfire. Wallace, who went on to become one of the country’s foremost experts on mortgage markets, has been haunted by it ever since. “We were told this was a hundred-year event, but my street had burned three times before,” she said. “Lots of places in California have burnt multiple times. And yet we build back.”
As wildfires bordering developed areas in the Western U.S., Australia, and around the world grow increasingly frequent and intense, Wallace has been crisscrossing the country and globe, presenting to government, business, and academic groups about the massive financial risk fires pose to the housing, real estate, and insurance markets—and to investors and homeowners. She has developed a new framework to quantify and evaluate the risk not only of wildfires, but also floods and other extreme weather events.
“The markets aren’t priced for climate change, and the situation is dire,” said Wallace, the Lisle and Roslyn Payne Chair in Real Estate and Capital Markets, chair of the Berkeley Haas Real Estate Group, and co-chair of the Fisher Center for Real Estate and Urban Economics. “Given my experience, I had an incentive to figure that out. I just didn’t have the data.”
“The markets aren’t priced for climate change, and the situation is dire.” – Prof. Nancy Wallace
Her recent working paper, co-authored by Prof. Richard Stanton; Paulo Isser, PhD 13, MBA 98, director of the Haas Real Estate & Financial Markets Lab; and Carles Vergara-Alert, MFE 04, PhD 08, now of Spain’s IESE Business School, is based on a massive data crunching effort.
It combines digitized maps on wildfire boundaries, geospatial measures of wind speed, direction and temperatures and humidity; topographical features such as slope and elevation; and vegetative coverage for 1.5 kilometer-square-grids covering all California wildfires from 2000 to 2018. The researchers combined that with data on housing prices, mortgage defaults, household demographics and wealth, and other market indicators.
“This allows us to quantify the risks of loss and the vulnerabilities in the fire insurance and mortgage capital markets, given changing weather patterns,” Wallace said.
Fire insurance rates in California have been skyrocketing, and many companies are refusing to write new policies on homes in particularly risky areas, such as canyons. Meanwhile, hundreds of thousands of homeowners have been dropped by their insurance companies. Based on Wallace’s analysis, about 1 million California homes are in high or very high-risk areas, with another 2 million to 4.5 million in vulnerable wildland-urban interface zones.
“Without a better pricing model, all the insurance companies can do is cancel the policies,” Wallace says.
Even so, Wallace and her co-workers found that the incentives in the current system are to rebuild: Wildfires have acted as a sort of gentrifying force, with people building back larger and more expensive homes. Homes in fire zones increased in size and value five years after a wildfire, the researchers found.
Now, Wallace is on a campaign to reform the hazard insurance pricing market, advocating for a switch from deterministic pricing—based on maps of past incidents—to more sophisticated probabilistic pricing, based on the probabilities that fires will occur in hazard zones. She believes the technology she and her collaborators have developed can be applied to estimate climate-change risk on housing and mortgage markets elsewhere.
“We just can’t pretend it’s not real,” she said. “We have no choice but to face it.”
The first thing real estate professor Nancy Wallace asked her students to think about last semester was rain.
“Pick a city like Miami,” said Wallace, chair of the Real Estate Group at Haas. “When it rains in Miami, the sewage treatment plants flood, the water mains back up, and the streets are flooded. The same with Houston. We’re not talking about a hurricane, which would be 10 times worse—just a regular very rainy day. Because the infrastructure in these cities is below sea level, the risk is just huge.”
And with that intro, students in Wallace’s Real Estate Investment and Sustainability class began to consider the risks for cities that are fundamentally unequipped and slow to adapt to the impacts of climate change.
From flooding to wildfires to rising temperatures and other extreme weather events, climate impacts have rapidly moved from the theoretical future to the most pressing challenges facing the real estate industry today. Wallace, co-chair of the Fisher Center for Real Estate and Urban Economics at Berkeley Haas, has responded by reshaping the real estate curriculum to focus on sustainability.
“The classes, our research, and everything that we now do will be taught through a lens of sustainability,” said Wallace, the Lisle and Roslyn Payne Chair in Real Estate and Capital Markets. “We’re addressing how climate change impacts all parts of the industry—from development and building to mortgages and mortgage-related securities to the insurance markets.”
The Fisher Center’s real estate program provides both academic and interdisciplinary training in real estate investment, real estate law, and the role of real estate development in the built environment. MBA students, along with students in the College of Environmental Design and Berkeley Law, can earn the Center’s Interdisciplinary Graduate Certificate in Real Estate (IGCRE).
Recent curriculum changes impacted two core real estate courses: Real Estate Investment and Sustainability, and Real Estate Finance and Securitization.
Project work in both classes centers on developments in cities, which occupy 2% of the world’s land mass but consume two-thirds of the world’s energy and account for 70% of carbon dioxide emissions, according to C40, a network of the world’s megacities addressing climate change. What’s more, most of the world’s urban areas are on coastlines that are at risk from rising sea levels and coastal storms.
Project work in both classes centers on developments in cities, which occupy 2% of the world’s land mass but consume two-thirds of the world’s energy.
“It’s so important that Haas is making this shift to help students approach these problems and move to solve them from the sustainability side,” said Michele de Nevers, executive director of Sustainability Programs at Haas.
The Real Estate Investment and Sustainability class, which Wallace co-taught with architect Edward McFarlan, examines the challenges and opportunities in creating the next-generation city, including rethinking density, transit, mobility, infrastructure, and equity.
Last spring, students worked on final team projects centered on sustainable redevelopment of two Bay Area sites: the Stonestown Mall in San Francisco, owned by Brookfield Properties; and the Bayfair Mall in San Leandro, owned by Madison Marquette.
Students assumed that both sites could be redeveloped with a “blank slate” approach, and their charge was to convert both sites to a mixed-use development with affordable housing and live-work-shop components.
The Bayfair Project, outlined in a class project book Wallace compiled called “Building the Sustainable City,” included ground floor retail, a solar canopy over the garage, a shared electric vehicle program, and EV charging. Students also recommended installing puzzle lifts, a semi-automatic parking system that moves cars both vertically and horizontally to create more parking space.
Looking back, Kyle Raines, MBA 21, said the project made him understand how ESG and sustainability extend to the community around a project and can help a project thrive in the long term. “Not only will it get good press, but it will help develop land around the project and create momentum,” he said.
What Raines learned in the class also helped him pitch investors when he was starting Crown Point, a real estate private equity fund. “The thing I think that most struck me from the class is how much investors care about ESG and sustainability—how creating that sense of community at that property is not only a competitive advantage, but also the right thing to do,” he said.
Angus Maguire, MBA 21, said the Bayfair Project helped him better understand the real estate industry and apply what he’d learned in class from the many industry speakers.
“I took the course because I knew I would be working with real estate developers or real estate asset owners sometime in the future in my renewable energy career, so wanted to better understand how they think about project economics,” he said.
In the Real Estate Finance and Securitization course, Wallace, who is teaching the class this semester, draws from real-world research and the students explore real estate market data in depth.
Sabin Ray, MBA 22, said one highlight was learning about Berkeley Law’s recent findings on the City of Berkeley’s well-intentioned Property Assessed Clean Energy Program. The program allowed property owners to borrow money for renewable energy systems or energy efficiency improvements, and make payments through a special assessment to their property tax bills. But the research found that the program raised the property taxes of low-income residents, while underdelivering the promised green benefits.
For their final projects, students in the class will be able to access the electronic S&P Global database through a subscription that the Fisher Center subsidized. The database includes balance sheet, performance, and corporate Environmental, Social, and Corporate Governance (ESG) strategies. Students tap the data to analyze current ESG strategies in the Real Estate Investment Trust (REIT) industry.
“The purpose of the Fisher Center subsidy is to provide MBA students with very granular firm-level data that connects the dots between performance and sustainability strategies within real estate operating companies,” Wallace said.
Ray said the sustainability focus of the course appealed to her and that the project finance work will help her as she pursues an impact investing career. “A lot of things we are learning in class I can apply to other areas of financing,” she said.