Does Climate Change Affect Investment Performance? Evidence from Commercial Real Estate

Abstract

Combining granular data on temperatures across the continental US with micro-level commercial real estate (CRE) data from 1980 to 2020, we study the impact of exposure to extreme temperature shocks on investment performance of CRE at the individual asset level. We find that exposure to extreme temperatures over the holding period significantly reduces average realized total and asset returns in CRE, as well as sale prices, with no significant effect on income returns. Our results are driven by higher climate-induced cash flow uncertainty of exposed assets. Heterogeneous treatment analysis by property sector lends some support to consumer demand channel.

Keywords: climate change, climate finance, commercial real estate, economic costs

JEL Classification: R30, F64, C21