Sea Level Rise and Commercial Real Estate

Abstract

I study the impact of sea level rise (SLR) on commercial real estate (CRE) pricing and commercial lending. Using novel property level sale transactions from 2011-2018, I find that commercial properties exposed to a 6-feet sea level rise are sold at a 6% discount, which increases over time. This discount appears to be driven by local buyers and buyers’ brokers that are more sensitive to climate risks. In addition, the discount significantly rises after an extreme hurricane, suggesting that salient risks impact pricing. Likewise, lenders require higher down payments for properties exposed to SLR, and this requirement is amplified following an extreme hurricane. However, the capitalization rate appears to be unaffected by sea level rise. These findings suggest that commercial real estate investors and banks are becoming more cognizant of the risks posed by sea level rise.

Keywords: Commercial Real Estate, Commercial Loans, Seal Level Rise, Climate Finance

JEL Classification: R33, G1, G14, Q54