Quantifying the impacts of climate shocks in commercial real estate markets

This study investigates the capitalization of climate shocks in commercial real estate owned and operated by professional investors. We focus on Hurricanes Harvey and Sandy to quantify the price impacts of climate shocks on commercial buildings in Texas and New York. We find clear evidence of a decline in transaction prices in hurricane-damaged areas after the hurricanes made landfall, compared to unaffected areas. We also observe that the “new news” about climate risk is significantly priced in both states—assets in locations outside the FEMA floodplain (with a lower prior perception of flood risk) that were inundated by the hurricanes experienced larger price discounts, indicating that actual flooding updates investors' perception of flood risk. Moreover, we find that the hurricane discount is more pronounced among buyers with more transaction experience. The transaction price discount also increases with higher climate change beliefs in the local market and among investors. Our findings underline the role of information provision and environmental awareness in the materialization of climate risks' impact on commercial real estate values.