Commercial Real Estate in the Face of Climate Risk: Insights from REITs

While climate risk is recognized as a substantial concern in finance and residential real estate, research examining its effects on commercial real estate markets remains limited. In this study, we contribute to this body of knowledge by constructing a firm-level climate risk measure. Our data, collected from the National Oceanic and Atmospheric Administration's county-level temperature database and a detailed property-level dataset of U.S. equity REITs from 1995 to 2020, enable us to investigate the effects of climate risk on commercial real estate at the firm level. Our findings suggest that REITs with greater exposure to climate risk - characterized by a higher percentage of properties located in counties experiencing abnormally elevated temperature changes - exhibit lower cash flows and firm values, as well as inferior stock returns. These adverse impacts from climate risk persist across various model specifications and control variables. Our study thus illuminates the economic implications of rising temperatures on commercial real estate from a portfolio perspective and provides empirical support for the temperature-based long-run risk model.