Heat Stress and Commercial Real Estate Returns

Abstract

We investigate the relation between heat stress (abnormal temperature) and the return on U.S. commercial real estate (CRE). Using temperature data from the National Oceanic and Atmospheric Administration (NOAA), we construct an abnormal temperature measure for each core-based statistical area (CBSA) in the U. S. We first document that U.S. metropolitan areas experienced higher temperatures from 2012 to 2019 than their historical averages. Next, employing the adoption of the signature Paris Agreement as an exogenous shock to investor attention regarding climate risk, we provide evidence that high abnormal temperature regions, on average, exhibit lower CRE returns after the accord. We also show that the negative relation between abnormal temperature and CRE returns is not driven by heterogeneity in the property locations, but rather, is likely attributable to the increased salience of environmental risk awareness in the post Paris Agreement era. Overall, this paper contributes to the emerging literature examining climate risk and real estate by providing evidence that abnormally high temperatures are negatively associated with CRE returns.

Keywords: climate risk, climate change, temperature, heat stress, commercial real estate.

JEL Classification: Q54, R11, R33