Do Sustainable Retrofits Pay Off? Evidence from U.S. Real Estate Investment Trusts

The growing emphasis on environmental sustainability and occupant well-being has made sustainable retrofitting a critical strategy in real estate sustainability. This study investigates whether sustainable retrofits deliver financial value for investors by examining their capital market implications in U.S. Real Estate Investment Trusts (REITs). Using quarterly data from 1994Q1 to 2022Q1, our baseline results show that a higher share of sustainable retrofit permits significantly reduces return volatility, indicating a risk-mitigating benefit valued by investors. Further analysis reveals that following the Paris Agreement, and during periods of regulatory risk exposure, capital markets respond to sustainable retrofit activities with both higher returns and lower volatility. These findings suggest that investor beliefs − shaped by awareness of sustainability and regulatory risks − are the primary mechanism driving the observed performance effects. Additionally, we find that sustainable retrofits mitigate the negative impact of market illiquidity on REIT volatility, highlighting their role in enhancing investor confidence. By providing the first empirical evidence on the investor-relevant benefits of sustainable retrofits, this study contributes to the literature on sustainable real estate investments and offers practical guidance for investors, managers, and policymakers aiming to promote environmentally and socially responsible practices within the sector.