Is the Sustainability of the External Environment Priced in Commercial Real Estate?

Abstract

This paper examines whether a sustainable external environment is priced into commercial real estate (CRE) by assessing properties' exposure to the carbon dioxide from local car emissions, making it among the first to explore how sustainable external environment impacts future CRE returns. Using a comprehensive dataset of US CRE properties over the period from 2002 to 2019, I find that properties situated in lower car emission areas yield an average of 1.5% higher annual returns compared to those in higher emission areas. These results hold even after accounting for property attributes, local economic conditions, environmental policies, public transportation usage, and potential endogeneity concerns. Furthermore, I explore the mechanisms through which car emissions impact CRE performance and find that high levels of greenhouse gas emissions primarily shape CRE performance by adversely influencing the future price appreciation of properties. Overall, this study helps bridge the gap in sustainable real estate literature by highlighting how CRE investors consider external environmental transition risks in their investment decisions.