Perceptions of Climate Change and the Pricing of Disaster Risk in Commercial Real Estate

39 Pages Posted: 4 Jun 2024

See all articles by Stace Sirmans

Stace Sirmans

Auburn University

G. Stacy Sirmans

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law

Greg Smersh

University of South Florida

Daniel T. Winkler

University of North Carolina (UNC) at Greensboro

Date Written: June 01, 2024

Abstract

This study investigates the relationship between natural disaster risk and capitalization rates (cap rates) in the U.S. commercial real estate market, focusing on the role of climate change beliefs in shaping this relationship. Utilizing a comprehensive dataset of over 4,800 single-tenant, net lease property transactions across the United States from 2014 to 2019, we combine property-level data with the Federal Emergency Management Agency (FEMA) National Risk Index and Yale Climate Opinions Map survey scores to examine how the pricing of disaster risk varies based on local climate change beliefs. Our findings suggest that higher disaster risk is associated with higher cap rates, with the effect being significantly more pronounced in areas with a stronger belief in climate change. We further explore the nuances in climate change beliefs, the role of political orientation, education, and age in shaping these beliefs, and the impact of recent exposure to natural disasters on the pricing of disaster risk. Our study contributes to the understanding of how investors incorporate natural disaster risk into their pricing decisions and highlights the importance of considering behavioral and perceptual factors in the analysis of environmental risks and asset prices.

Keywords: JEL Classifications: R3, G12, G40, Q54 Commercial Real Estate, Climate Change, Global Warming, Natural Disasters

Suggested Citation

Sirmans, Stace and Sirmans, G. Stacy and Smersh, Greg and Winkler, Daniel T., Perceptions of Climate Change and the Pricing of Disaster Risk in Commercial Real Estate (June 01, 2024). Available at SSRN: https://ssrn.com/abstract=4851196 or http://dx.doi.org/10.2139/ssrn.4851196

Stace Sirmans (Contact Author)

Auburn University ( email )

Auburn, AL 36849
United States

HOME PAGE: http://www.stacesirmans.com

G. Stacy Sirmans

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law ( email )

College of Business
Tallahassee, FL 32306
United States
850-644-8214 (Phone)
850-644-4077 (Fax)

Greg Smersh

University of South Florida ( email )

College of Business Administration Dept. of Finance
St. Petersburg, FL 33701
United States
727-553-1619 (Phone)

Daniel T. Winkler

University of North Carolina (UNC) at Greensboro ( email )

P.O.Box 26170
Greensboro, NC 27412
United States

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