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 significantly reduces average realized total returns in CRE. This result is driven by reduction in asset returns. We do not observe a significant effect on income return. We document substantial variation in sensitivity to temperature shocks across property types. Our results are driven by shocks to time-varying CRE risk premium due to climate-induced decreased predictability of future cash flows.