Price Impact of Climate Risk on Commercial Real Estate

We study how hurricane-related climate risk affects the commercial real estate (CRE) market using hurricane Sandy as an example. We introduce an ex-post climate risk measurement for CRE assets by supplementing a sample of CRE transactions in the New York Metropolitan Area before and post Sandy with a dataset containing detailed assessments of the severity of the storm-related damage and flooding. Among the four major types of CRE assets including offices, retail stores, warehouses, and apartments, we only document a significant and negative price impact by Sandy to offices, whereas no significant effect on the value of other CRE types. Specifically, we find robust evidence that unaffected office assets surrounded by severely damaged properties within proximity experienced a significant price penalty for four years following the storm. Meanwhile, we did not find any significant price impact on unaffected office assets with moderately damaged properties or flooded properties nearby. Additionally, it seems that the documented price penalty to unaffected office assets located in most severely damaged neighborhoods is mainly driven by a decline in building occupancy. We attribute the differential impact of Sandy on office and other CRE to the increase in remote work for office employees triggered by Sandy. We also note that the absence of any impact of Sandy on other CRE, including apartments, compared to significant and negative impact on single family homes reported in earlier studies (Fang et al. 2023) is an indication of more rational expectations and pricing in the commercial space.