Perceptions of Climate Change and the Pricing of Disaster Risk in Commercial Real Estate

This study investigates the relationship between natural disaster risk and capitalization rates (cap rates) in the U.S. commercial real estate market, focusing on the role of climate change beliefs in shaping this relationship. Utilizing a comprehensive dataset of over 4,800 single-tenant, net lease property transactions across the United States from 2014 to 2019, we combine property-level data with the Federal Emergency Management Agency (FEMA) National Risk Index and Yale Climate Opinions Map survey scores to examine how the pricing of disaster risk varies based on local climate change beliefs. Our findings suggest that higher disaster risk is associated with higher cap rates, with the effect being significantly more pronounced in areas with a stronger belief in climate change. We further explore the nuances in climate change beliefs, the role of political orientation, education, and age in shaping these beliefs, and the impact of recent exposure to natural disasters on the pricing of disaster risk. Our study contributes to the understanding of how natural disaster risk is incorporated into the pricing of commercial real estate and highlights the importance of considering behavioral and perceptual factors in the analysis of environmental risks and asset prices.