Climate Risk and Real Estate Prices: What Do We Know?

There is a growing international consensus that climate change represents one of the most important structural forces and risks that long-term investors need to proactively consider in building resilient portfolios. Many institutional real estate investors have significant exposure to cities and regions that are economically important but increasingly susceptible to climate change impacts. In this article, we review and synthesize existing academic research on risk exposure to acute and chronic climate-related events and forces and their impacts on property asset values and lending practices. Evidence to date is dominated by studies focused on residential property, although some recent research has begun to examine the commercial real estate sector in a more rigorous way. We draw inferences from the residential studies for how these findings might apply to commercial real estate and highlight the more recent studies focused on commercial property. Recent research is published within both real estate and broader economics and finance journals; these articles indicate that awareness of climate risks is having a more sustained impact on pricing and on investor decision making, although the channels through which impact occurs are generally opaque and warrant further research. Key Findings ▪ Historically, property prices decline after climate events but tend to eventually recover. Recent evidence suggests that climate events in geographies that previously suffered little exposure to extreme weather can lead to a long-lasting decline in prices or liquidity. ▪ Some evidence from residential markets shows that levels of belief in climate change and confidence in government-led mitigation of impacts may result in differing levels of price impacts where risks lie primarily in the future, such as sea level rise. In this respect, the nature of the marginal investor is important. ▪ Commercial owners/investors in some geographies are placing a higher risk premium on all properties in metro areas affected by climate events, regardless of whether their individual properties have been directly affected.