This paper provides the first study of climate risk pricing in euro area commercial real estate markets. We pay particular attention to changes in risk pricing over time, as a sudden market shift may significantly amplify the financial stability and macroeconomic implications of these risks. We find evidence of investors applying a penalty to buildings exposed to physical risk and that this penalty has increased significantly over the 2007-2023 period we study, particularly for properties exposed to risks associated with climate change. This change in pricing appears to have occurred in an orderly manner, with no implications for liquidity in the market for high risk buildings. In contrast, while pricing of transition risk has also increased over the period studied, towards the end of our sample the market response to transition risk appears to be playing out via market liquidity. This indicates that older buildings - which are more exposed to transition risks - may already be at risk of becoming “stranded assets”.
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