Climate change and commercial real estate: Evidence from Hurricane Sandy

Abstract

[Jawad M. Addoum, Piet Eichholtz, Eva Steiner and Erkan Yönder] study how professional investors capitalize flood risk in commercial real estate (CRE) markets after hurricane Sandy. [The authors] show that New York CRE exposed to flood risk trades at a large, persistent discount. CRE in Boston, which mostly escaped direct hurricane-related damage, also exhibits persistent price penalties. These price effects are driven by asset-level capitalization rates, not building occupancy. Results from a placebo test using real estate prices in Chicago show that our inferences are not driven by coincidental, unrelated price trends for waterfront real estate assets. [Their] results are consistent with professional investors responding to a persistent shift in the salience of flood risk post-Sandy, even in locations spared by the disaster.

Table 2 presents the output from Equation (4). Column (1) shows the price impact regression results for New York. The estimates suggest that, all else equal, a one-mile increase in coastal proximity is associated with 21.6% slower price appreciation. The authors present the results for Boston in column (2). The estimates suggest that a one-mile increase in coastal proximity is associated with 9.5% slower price appreciation. The economic magnitude of this effect is equivalent to about 40% of the effect [they] estimate in New York. Given the absence of physical damages in Boston, [Addoum, Eichholtz, Steiner and Yönder] attribute this portion of the effect to increased salience and perception of flood risk, and the remaining 60% of the New York effect to the economic fallout from physical damages sustained during Sandy.

https://doi.org/10.1111/1540-6229.12435
by Jawad M. Addoum, Piet Eichholtz, Eva Steiner, Erkan Yönder
Real Estate Economics via Wiley

First published: 23 March 2023 

Open Access