Thursday, May 11, 2023

Climate change and commercial real estate: Evidence from Hurricane Sandy

[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.
by Jawad M. Addoum, Piet Eichholtz, Eva Steiner, Erkan Yönder
Real Estate Economics via Wiley
First published: 23 March 2023 
Open Access

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