Commercial real estate and air pollution

We analyze the causal effect of air pollution (acute fine particulate matter) exposure on the commercial real estate (CRE) market. We instrument for air pollution using changes in local wind direction to find that an increase in fine particulate matter exposure leads to a contemporaneous decrease in CRE market values and (net) income as well as an increase in capital expenditures. Heterogeneous treatment analysis within a building-level fixed effects framework uncovers that the negative effect on market values is concentrated in the office sector, consistent with the notion that air pollution-induced decreases in CRE values are driven by a reduction in CRE assets’ productive capacity. Additionally, we document that the negative impact on (net) income is concentrated in the apartment sector, which is consistent with a broad set of local disamenity mechanisms identified in previous residential real estate literature.