Physical Climate Risk in Real Estate: The Wildfire Risk Exposure of US REITs

Abstract

This study examines how physical climate risk affects public real estate companies, particularly wildfire risk, using data on 62 US equity REITs from 2004 to 2023. First, the price volatility of REITs exposed to wildfire risk is estimated using market betas. Additionally, the dynamics of actual wildfire events in Arizona, California and Texas are studied to understand their effect on REIT returns and differentiate these effects from longer-term hypothetical risk measures. The empirical results show that decreasing exposure to high wildfire risk areas decreases REIT betas. Results from the event study suggest that REITs only experience negative abnormal returns when fires break out in the wildland-urban interface (WUI) as opposed to remote rural areas.