Real estate investors often worry that their portfolios might be pummeled by economic factors such as rising interest rates. But there are plenty of other concerns—rising sea levels, earthquakes, overpopulation, social inequity, pollution, crime, and poorly functioning government. Globalization, climate change, and aging populations are creating dramatic changes at the country, city, and neighborhood level. These changes, in turn, are likely to have a profound impact on the built environment.

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The traditional methods of assessing real estate investment risk—such as standard deviation of returns, projected vacancy rate, and forecast rental growth—fall short in a world in which the basic patterns of the last two centuries are undergoing drastic transformation.

Global property group Grosvenor has long realized that its future success is tied to the sustainable growth of the cities where it has a presence. The company, like other long-term global investors, has a vested interest in helping create and manage vibrant, viable cities. At the same time, the firm and its investors seek to preserve real estate capital values and generate sustainable rental income.

In order to better plan and manage its global portfolio, Grosvenor undertook a three-year study, titled Resilient Cities, seeking new ways of measuring cities’ long-term resilience and identifying the world’s most resilient cities. “Resilience” is defined as the ability of cities to continue to function as centers of production, human habitation, and cultural development despite the challenges posed by climate change, population growth, declining resource supply, and other paradigm shifts.

The study examined and ranked 50 of the world’s most important cities. Although these cities account for only 7 percent of the world’s population, they represent the major focus of most global real estate investment and consume the lion’s share of the world’s resources. Thus, the fact that so many struggle to meet basic levels of resilience indicates how unprepared the rest of the world is to face the next century’s major challenges.

In the context of this study, vulnerability is not the same as susceptibility. Some societies are better prepared for adverse events and are more adept at bouncing back: witness New York City’s rapid recovery from the impacts of 9/11 and, more recently, Hurricane Sandy. At the opposite end of the spectrum is the devastation wrought in the Philippines by Typhoon Haiyan this past November.

To recognize this ability, the study weighs “adaptive capacity” equally with vulnerability in order to assess overall resilience. A city’s resilience is a negative function of its vulnerability and a positive function of its adaptive capacity. The results can be counterintuitive. For example, investors tend to shun cities with high taxes and regulatory burdens; however, cities that invest tax revenue in public infrastructure, planning systems, and support for employment growth can increase their resilience significantly, thus improving long-term investment prospects.

On Top of the World

Results from the study indicate that Canadian cities are the world’s most resilient, taking the three top positions, with Toronto having the highest score, followed by Vancouver and Calgary. Two inland U.S. cities, Chicago and Pittsburgh, come in next. The top ten most resilient cities are in North America and northern Europe, and the ten least resilient—including Mexico City, São Paulo, and Mumbai—are in emerging markets. Scores for North American cities range from 100 (the top score) for Toronto to 87 for Houston. Scores for European cities range from 94 for Stockholm to 60 for Moscow. There is a greater range for Asian cities, from Tokyo’s score of 85 to just 57 for Guangzhou.

But the sand shifts when the cities are ranked purely in terms of adaptive capacity, with U.S. cities taking six of the seven highest positions. New York City leads the pack, followed by Toronto, Los Angeles, Washington, D.C., Chicago, San Francisco, and Houston. The reason for this disparity is that North American cities have well-established response, planning, and funding systems in place—either at the local or national level—allowing them to effectively cope with threats and disasters. In contrast, Europe has strong planning systems but loses points due to higher energy costs and a relatively old population. Asian cities have relatively weak planning systems and are vulnerable to environmental degradation.

Crunching the Numbers

To create these rankings, the research team studied more than 160 data sets covering a two-year period—2012 and 2013—from robust, industry-accepted sources such as the World Bank; the International Monetary Fund; the United Nations Educational, Scientific, and Cultural Organization (UNESCO); the Economist Intelligence Unit, and others. The model examined indicators in five main thematic areas for both vulnerability and adaptive capacity.

To assess vulnerability, the five main themes were:

climate—vulnerability to rising sea levels, storms, temperature change, drought, or extreme events such as earthquakes, tsunamis, or even volcanic eruptions;

environment—measurements of all types of pollution, as well as urban sprawl;

resources—vulnerability to potential shortages of water, food, fuel, and other critical resources, and the ability of the population to access such resources;

infrastructure—the quality and accessibility of transportation, resource provision by utilities, and high-quality housing; and

community—the expected impacts of changing demographics, livability, crime, health, education, affordability, inequality, culture, and even corruption.

The five major themes analyzed to assess adaptive capacity were:

governance—whether the city is governed in a democratic and transparent manner, with citizen participation;

institutions—whether government and nongovernmental organizations have the capacity to deliver services effectively;

technology—whether the city can draw on technical expertise from local universities and other groups that foster innovation, and whether it has national monitoring systems in place;

planning systems—whether the city has risk-based land management, disaster management plans, and well-rehearsed emergency procedures; and

funding structures—whether the city has sufficient funding, including the ability to issue debt, to cope with disasters and strengthen infrastructure.

Case Studies in Resilience

Among the observations in the Grosvenor report regarding specific cities are the following:

New York City: As a coastal city, New York is vulnerable to higher sea levels and storm events such as Hurricane Sandy; other challenges include a potential increase in severe weather events and growing social inequality. To counteract these trends, the city has launched an ambitious long-term plan with initiatives ranging from investment in green infrastructure to providing economic opportunity. With strong governance, excellent educational institutions, flexible financial tools, and investment in monitoring systems, New York achieves a score of 100 in adaptive capacity and 80 in vulnerability, resulting in an overall resilience score of 92.

Vancouver: The site of ULI’s 2014 Spring Meeting, Vancouver ranks second to Toronto as the most resilient city of the 50 in the Grosvenor study. Its sole major vulnerability is its low-lying coastal location. This city of 600,000 scores particularly well in governance, planning systems, and funding structures, contributing to its overall resilience score of 98.

Mexico City: Illustrating the other end of the resilience spectrum is Mexico City, with an overall score of 56. The city’s older buildings are vulnerable to earthquakes, while central areas are subsiding due to overdrainage of groundwater. The western areas could see landslides and flooding from extreme rainfall. Road and public transportation systems are inadequate for the burgeoning population. Well-publicized community vulnerabilities include violent and petty crime, inadequate public health care, social inequity, and corruption. The city fares no better in adaptive capacity: institutional capacity, especially government effectiveness, is particularly weak, despite relatively strong disaster and sustainability planning systems.

Shanghai: This city of more than 17 million people on China’s east coast ranked as one of the ten least resilient, with a score of 62. Like Mexico City, Shanghai is experiencing rapid population growth that is straining infrastructure and transportation systems. Although located at the mouth of the Yangtze River, the city has begun experiencing shortages of clean water due to extensive water pollution. Nearby heavy industries release high levels of particulates. Despite good funding resources and investment in infrastructure, Shanghai scores low in adaptive capacity, especially in governance. Some may argue that the study has a pro-democracy, Western bias, but the democracy-related data sets count for only one-tenth of the adaptive capacity score. While Shanghai may offer profitable investment opportunities in the short run, its vulnerability and low adaptive capacity may threaten values over time.

London: A perennial favorite of global real estate investors, attracting £52 billion (US$85 billion) in 2013, according to Real Capital Analytics, London earned a surprisingly low score of 90 due to vulnerabilities that are entirely manmade. In 1982, London invested in the Thames Barrier, one of the world’s largest movable flood prevention barriers. Despite high-level technology, transparent governance, world-class learning institutions, and a significant transportation upgrade that is underway, the British capital must address the challenges of a slowly unraveling social fabric. Petty crime and lack of affordable housing are pervasive. Other areas of concern include an aging citizenry, high levels of energy consumption, and pollution.

Study Implications

Grosvenor Research broke new ground with this study, which was limited by the dearth of historical data and the lack of a standard model for measuring resilience. In fact, a major motivation for this project was to generate debate within the industry and a consensus to develop tangible measurements of vulnerability, adaptive capacity, and city resilience. Like almost all research studies, this one ends with a call for . . . more research.

In spite of its limitations, the study has clear implications and immediate use. It provides a robust long-term investment risk measurement that can help many organizations with a fiduciary duty to guard the value of their investments over the long term—including pension funds, insurance companies, sovereign wealth funds, trusts, and others. The insights provided can help long-term investors create portfolios that optimize returns to minimum vulnerability scores or maximum adaptive capacity. The research also can be employed by government authorities to judge their performance, assess future risks, and improve their capability to adapt to adverse events in an increasingly uncertain world.

Richard Barkham, a member of the Royal Institution of Chartered Surveyors, is global research director for the London-based Grosvenor Group.