Does Climate Change Affect Investment Performance? Evidence From Commercial Real Estate
73 Pages Posted: 11 Nov 2021 Last revised: 28 Mar 2023
Date Written: March 27, 2023
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.
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