Where, When, and How Do Sophisticated Investors Respond to Flood Risk?

38 Pages Posted: 23 Jul 2018 Last revised: 26 Jun 2019

See all articles by Piet M. A. Eichholtz

Piet M. A. Eichholtz

University of Maastricht - Limburg Institute of Financial Economics (LIFE)

Eva Steiner

Cornell SC Johnson College of Business

Erkan Yönder

John Molson School of Business, Concordia University

Date Written: 2019

Abstract

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

Eichholtz, Piet M. A. and Steiner, Eva Maria and Yönder, Erkan, Where, When, and How Do Sophisticated Investors Respond to Flood Risk? (2019). Available at SSRN: https://ssrn.com/abstract=3206257 or http://dx.doi.org/10.2139/ssrn.3206257

Piet M. A. Eichholtz

University of Maastricht - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883648 (Phone)
+31 43 3258530 (Fax)

Eva Maria Steiner (Contact Author)

Cornell SC Johnson College of Business ( email )

465B Statler Hall
Ithaca, NY 14853
United States

HOME PAGE: http://https://sha.cornell.edu/faculty-research/faculty/ems457/

Erkan Yönder

John Molson School of Business, Concordia University ( email )

Montreal
Canada

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