Does Climate Change Affect Investment Performance?

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. Our results are driven by higher cash flow uncertainty of exposed assets. Heterogeneous treatment analysis by property sector lends some support to consumer demand channel.

Keywords: climate change, commercial real estate, temperature extremes, cash flow uncertainty