Speaker: Dongxiao Niu

Abstract: This study estimates the capitalization of climate shocks on commercial real estate owned and operated by sophisticated investors. We focus on Hurricane Sandy and Hurricane Harvey to quantify the price impacts of climate shocks on commercial buildings in the U.S. We find clear evidence of a decline in transaction prices in hurricane-damaged areas after the hurricane made landfall, compared to unaffected areas. Moreover, we observe that properties in locations with stronger market fundamentals in the local area or in the small portfolios owned by local investors show smaller discounts for the climate risk. These results demonstrate that the “climate shock discount” in real estate prices depends on the “replaceability” of the current asset (and associated location) in investors’ choice set. If a property is less replaceable in the investor’s location choice set or asset choice set (portfolio), the investors are willing to claim a smaller price discount because they do not have enough other good alternatives to choose from. We also create an index using Google search to rank investors with respect to their “marketing greenness” and document that these “green” investors are likely to claim a larger price discount for properties at higher climate risks.