Where, When, and How Do Sophisticated Investors Respond to Flood Risk?
38 Pages Posted: 23 Jul 2018 Last revised: 26 Jun 2019
Date Written: 2019
While the empirical evidence on the pricing of flood risk exposure in residential real estate held by uninformed households is mixed, this study shows that sophisticated investors in commercial real estate markets rationally respond to heightened flood risk by bidding down the prices of exposed assets. Using a detailed property-level database on commercial real estate transactions completed in New York, Boston, and Chicago before and after the shift in the salience of flood risk caused by Hurricane Sandy, we document that properties exposed to flood risk experience slower price appreciation after the storm than equivalent unexposed properties. We further show that: the price effect is not driven by physical damage incurred from Hurricane Sandy, nor by concurrent unrelated pricing trends for waterfront property; it persists through time, suggesting it does not reflect a temporary overreaction that is subsequently reversed; it is driven by higher risk premiums for exposed properties; and it is exacerbated by contagion from locally important occupiers.
Keywords: flood risk, asset prices, real estate
JEL Classification: G14, Q54, R33
Suggested Citation: Suggested Citation