Climate Transition Risk in the Real Estate Sector: Does Decarbonization-Driven Regulation Affect REIT Valuation?

Climate transition risk is emerging as a critical determinant of value in real estate finance as cities adopt increasingly stringent decarbonization policies, adding to the pressure of physical risk. New York City’s Local Law 97 (LL97), which imposes binding emissions caps and financial penalties on large buildings, offers a salient case to examine how capital markets respond when building-sector climate regulation becomes financially consequential. This paper investigates whether and how U.S. equity Real Estate Investment Trusts (REITs) with exposure to New York City assets are impacted by climate transition policies like LL97. Using a standard event study framework, the analysis examines abnormal returns around two key milestones: the policy’s approval as part of the Climate Mobilization Act in April 2019 and the onset of its enforcement phase in January 2024. Results show that the initial announcement generated statistically insignificant cumulative abnormal returns, suggesting that investors did not price LL97’s long-term horizon implications at the time of the vote. By contrast, the enforcement milestone coincided with economically meaningful negative abnormal returns across most sampled REITs, particularly those with substantial New York City office exposure, although these effects are not statistically significant and can be attributed to broader sectoral stress. Cross-sectional tests reveal no significant differences between highly and moderately exposed groups. Overall, while isolating the impact of transition risk alone is empirically challenging, the findings suggest that climate-related transition risk is priced gradually, potentially non-material in the short term and can become more salient as implementation approaches.