Beyond the actual risks of climate-driven property damage, new research suggests a strong link between local cap rates and local perceptions of climate change, especially in climate-impacted cities. This research gives us tools to find and exploit the gap.

Although the Haystack is unwilling to debate climate change, everyone has opinions about it. But in today's data-driven investment world, do those beliefs actually impact your bottom line? The answer may surprise you. A recent study by four academics delved into this and some juicy related questions, and learned that how you perceive climate change-related risk - whether you are a believer that climate change is real - turns out to have a significant impact on what you’ll pay for a property.² Or, as they say, “heterogeneity in climate change beliefs across investors can have significant implications for real estate markets.”

The study, like others before, confirmed what we all intuitively think: greater actual risk of disaster is associated with higher cap rates. They saw this over a broad sample set: more than 4,800 single-tenant, net leased transactions across the U.S. from 2014 to 2019. For each transaction the authors had the NOI, sales price and cap rate (obviously), among other characteristics.

But beyond actual risks driving cap rates higher, the researchers wanted to know if the perception of climate risk mattered. They cracked the code by overlaying two powerful datasets. First, they used FEMA's National Risk Index to objectively measure each property's actual disaster risk. Then came the brilliant twist: they mapped this against Yale Climate Opinion Maps to identify whether each property sat in a climate-change-believing or skeptical market. This methodology allowed them to separate actual risk from perceived risk—revealing a pricing gap that smart investors can exploit.

Things get interesting when the authors slice up the sample set based on local climate change beliefs. In high-belief areas, cap rates went up much faster for every incremental increase in actual risk vs. in low-belief areas, where they barely moved at all as actual risk increased. Specifically, on average for every FEMA Index increase of one standard deviation, the authors saw an average cap rate increase of 8.2 basis points, but the magnitude of this increase is “more than six times higher in areas with high climate change belief compared to those with low belief.”

So where are properties seeing the most climate-related pricing discounts? Three places, and these sometimes overlap. First, Democratic counties with high concentrations of young, educated, left-leaning individuals, which does not feel surprising, as they are high-climate-change-belief populations. Second, there’s a high effect in “areas that report discussing climate change often and areas with high media coverage on the topic,” and that we imagine overlaps with Democratic counties. The third area is different: Low-climate-change-belief counties that have suffered a recent natural disaster. All these areas see much higher cap rates per unit of disaster risk vs. low-belief areas - creating arbitrage opportunities for investors who can recognize the pattern.

Taking a wider-angle view, the creation of the FHFA tool mentioned at the top is obviously not a news event, but it is a natural result of all the climate-risk-related news events that are in evidence, especially climate-tied insurance rate increases and accelerating rates of natural disasters (and related insurance claims). Those are IRL trends. And responsible investors should have a position on climate-related risk in their assets. We give credit to the authors and this research for not taking a position on what people should be doing. They don’t do climate fear-mongering and they don’t do denial. Their goal (and ours here) is to simply expose the inefficiencies, regardless of anyone’s personal climate views.

This is academic research working the way it’s supposed to: They ask the right investment question, “Why do market actors behave as they do given this set of circumstances?” That provides the rest of us a literal map of where climate-related premiums and discounts will show up, and investors can apply their own individual beliefs and make fiduciary decisions more intelligently as a result.

The learning: People perceive the risk of climate-change disasters very differently and price real estate accordingly. If you’re buying or selling in a market that has climate-related risk at all, it’s wise to take the extra step to use the lens provided in this study to assess how investors are likely to view your asset. You can get started by clicking on the maps above.

The Rake

Three good articles.

• Record Multifamily Absorption Signals Strong Start to 2025 - Globe St.

  Demand for apartments exploded in early 2025, with a record-breaking 138,000 units absorbed in the first quarter alone! This surge, coupled with slightly easing supply, is pushing occupancy and even rent growth upwards in many markets, signaling a powerful start to the year.

• Manhattan Office Leasing: Back to Pre-COVID Levels - CRE Daily

  Manhattan's office market is roaring back to life, hitting pre-pandemic highs! Office leasing surged to 12.2 million square feet in the first quarter of 2025, fueled by major renewals and expansions. Vacancy rates near 3-year low. (Colliers)

• Multifamily M&A Alert: Big Money Moving In - Globe St.

  Top private equity firms are reportedly circling major multifamily REITs for potential takeovers, hinting at a surge of billion-dollar deals. This signals huge confidence in the future of rentals and could reshape the investment landscape.

The Harvesters

Someone making real estate interesting. They don't pay us for this, unfortunately.

Who: PetScreening

What: Proptech firm serving multifamily managers with software that reviews service animal accommodation requests and manages the pet population in a property with a “real-time pet dashboard.”

The Sparkle: I’m sorry, what? That was our first response to PetScreening: An eye-roll about how we have proptech solving problems that don’t exist. Well, turns out PetScreening serves more than 7 million units and just raised an $80M Series B. Their core competency is helping managers, including Greystar and Equity Residential, comply with the Fair Housing Act and other regulations. Riches in niches…

From the Back Forty

A little of what’s out there.

Loosely related to today’s theme about what is true vs. what we believe to be true, have you heard of the McGurk effect? It’s when you see someone speaking but what they say does not sync up with the movements of their mouth. This is a problem for your brain, which quickly decides to throw out the actual sound and let you ‘hear’ what the person’s mouth looks like it’s saying. Get McGurk’d at this great and quirky video.

Link: https://www.youtube.com/watch?v=2k8fHR9jKVM

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1  https://www.fhfa.gov/news/news-release/fhfa-releases-mortgage-loan-and-natural-disaster-dashboard

2  Sirmans, Stace and Sirmans, G. Stacy and Smersh, Greg and Winkler, Daniel T., Perceptions of Climate Change and the Pricing of Disaster Risk in Commercial Real Estate (June 01, 2024). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4851196