Study discovers link between vehicle emissions and commercial real estate returns

As sustainability rises to the forefront of investment strategy, new research from Virginia Tech reveals that environmental factors, specifically vehicle emissions, play a measurable role in shaping commercial real estate performance.

Hainan Sheng, assistant professor in the Blackwood Department of Real Estate, found commercial properties in the U.S. with lower household car-related carbon emissions yield, on average, 1.5 percent higher annual returns than comparable properties in higher-emission areas. This suggests that investors are beginning to account for environmental transition risks when valuing commercial real estate, a market valued at more than $32 trillion as of 2020.

Using a comprehensive dataset covering U.S. commercial properties from 2002-19, the study published in the Journal for Real Estate Research shows:

• Properties in low-emission areas outperformed those in high-emission areas by about 1.5 percent annually.
• These effects hold even after accounting for property characteristics, local economic conditions, environmental policy, and public transit usage.
• The impact of emissions is seen primarily in future price appreciation, not operating income, suggesting that long-term growth potential is most affected.
• Political context matters: The effect of car emissions on commercial real estate returns is strongest in states with a Democratic political leaning, where environmental policy responses are often more pronounced.

“This research shows that the sustainability of a property’s external environment matters,” said Sheng. “It isn’t just about whether a building has a green certification. The broader community context, in this case, emissions from transportation, directly affects how investors view long-term value.”

According to Sheng, real estate research has focused on how green buildings and environmental certifications affect asset value and firm performance. However, few studies have examined whether the sustainability of the external environment, the surrounding neighborhood or region, also influences investment outcomes.

According to the U.S. Environmental Protection Agency, the transportation sector is the single largest contributor to U.S. carbon dioxide emissions, with motor vehicles accounting for more than 80 percent of transportation-related carbon dioxide emissions in 2019 and 2022. Sheng’s research places this factor at the center of commercial real estate analysis, highlighting how broader community sustainability, not just building-level efficiency, drives investor decisions.

Commercial real estate investors are already incorporating environmental risks into their decision-making, even if indirectly, Sheng’s findings suggest. Higher local emissions may signal greater future policy interventions, market shifts, or consumer preferences that could dampen property appreciation.

Beyond investment implications, the research highlights how transportation policies and community-level sustainability efforts may carry direct financial benefits, reinforcing the interconnectedness of urban planning, environmental stewardship, and economic performance.

This study builds on emerging research exploring how environmental factors shape financial markets, particularly the pricing of climate transition risks, the financial and operational risks associated with moving toward a low-carbon economy. While prior work has emphasized the premium attached to environmentally certified buildings or exposure to greenery, Sheng’s research is among the first to document how local emissions, and by extension, local policy environments influence commercial real estate pricing.

Written by Alex Kerstetter