Climate Risk and Commercial Mortgage Delinquency

Abstract

Natural disasters such as hurricanes, floods, heatwaves and wildfires are projected to become more prevalent in the foreseeable future. Climate risk is therefore increasingly recognized as an important factor by policy makers, the investment community, and financial markets. Due to the immobility of assets, the commercial real estate industry is especially vulnerable to climate risk, and there is an increasing interest to understand the impact of climate risk on the value of commercial real estate. For commercial real estate lenders, changes in collateral value are only of partial importance. The ability of borrowers to meet their payment obligations is equally, if not more important. By combining historic data on two major climate-related disasters – Hurricanes Harvey and Sandy – with longitudinal information on commercial mortgage performance, this paper identifies the impact of climate risks on mortgage delinquency rates for commercial real estate mortgages. The results show that both Harvey and Sandy led to elevated levels of commercial mortgage delinquency, with significant heterogeneity based on the extent of damage in the Census block group. Information provided through FEMA 100-year floodplain maps partially mitigates the effects, an indication that lenders incorporate flood risk information in the underwriting process.

Keywords: Natural Disasters, Climate Risk, Mortgage Delinquency, Commercial Real Estate

JEL Classification: G14, G40, G41, Q54, R33