Quantifying the Impacts of Climate Shocks in Commercial Real Estate Market
34 Pages Posted: 14 Nov 2022 Last revised: 20 Oct 2023
Date Written: October 10, 2022
Abstract
This study investigates the capitalization of climate shocks in commercial real estate owned and operated by sophisticated investors. We focus on Hurricanes Harvey and Sandy to quantify the price impacts of climate shocks on commercial buildings in the U.S. We find clear evidence of a decline in transaction prices in hurricane-damaged areas after the hurricane made landfall, compared to unaffected areas. We also observe that the new news about climate risks is significantly priced in both states – Assets in locations outside the FEMA floodplain (with less prior perception about climate risk) have experienced larger price discounts after the hurricanes. Investors could use realized flooding to learn about their flood risk. Moreover, the price discount is larger when the particular buyer has more climate awareness and has a more geographically diverse portfolio so it is easier for her to factor in this risk in the portfolio construction. Furthermore, we create an index using Google search to rank investors with respect to their environmental awareness and document that more pro-environment investors are likely to claim a larger price discount for properties in areas that face higher climate risk. Similarly, if a property is less replaceable in the investor’s location choice set, the investors are willing to accept a smaller price discount because there are fewer alternatives. Our findings underline the importance of information provision and environmental awareness in order to accurately capitalize climate risk in commercial real estate as the cost of climate change becomes more salient.
Keywords: Climate change, Asset prices, Commercial real estate, Flood risk
JEL Classification: G12, Q54, R33
Suggested Citation: Suggested Citation