European Central Bank working paper finds climate risk discounts are rising in euro area office markets while transition risk is increasingly reflected in liquidity

The European Central Bank published an ECB Working Paper assessing whether euro area commercial real estate investors price climate-related physical and transition risks, and how this pricing has evolved over time. Using euro area office market transactions from 2007 to 2023, the authors find that physical climate risk has attracted a growing price penalty in a largely orderly way, while transition risk appears to be increasingly expressed through reduced liquidity for older buildings. The analysis matches large office property transactions (mostly EUR 10 million or more) with physical hazard scores from the Four Twenty Seven dataset and uses hedonic regressions to control for factors such as year, country, central business district location and regional economic conditions. For physical risk, investors are found to apply a discount to buildings in areas with high exposure, with the estimated penalty increasing by 24 percentage points over 2007 to 2022 and becoming consistently evident from 2012 onwards; around a quarter of transacted offices have at least one high physical risk score, but their share of transactions remains stable, suggesting no material liquidity deterioration for high-risk buildings. For transition risk, building age and time since renovation are used as a proxy for energy efficiency, with the premium for buildings under five years old rising by 18 percentage points over 2007 to 2023; however, from 2018 the transaction mix shifts away from older buildings, indicating that transition risk concerns may be affecting market liquidity and raising the prospect of “stranded assets.” From a policy perspective, the paper points to the relevance of macroprudential tools to strengthen resilience to climate risks and highlights persistent data gaps, particularly on the energy efficiency of the building stock.