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Commercial Real Estate Prices and Cycles

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Regatta B
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Robert Kurtzman, Federal Reserve Board

Quality, Deal Size, and Investment Returns of Commercial Real Estate

Liang Peng
,
Pennsylvania State University

Abstract

For many important assets in the economy that have high values, are undividable, and cannot be shorted, individual deals’ attributes may affect their investment returns. This paper empirically tests whether commercial real estate’s investment returns are related to their quality, which is measured with net operating income per square foot, and deal size, which is measured with their acquisition prices. Analyzing a sample of about 6,200 properties with a total value of $230 billion over the 1977 to 2017 period, I find that properties with higher quality tend to have positive abnormal returns, both before and after adjusting for risk, though such returns diminish over time. I also find that larger deals tend to have negative abnormal returns, both before and after adjusting for risk.

Leverage Cycles in a Mature Asset Class: New Evidence from a Natural Laboratory

Tobias Muhlhofer
,
University of Miami
Robert Connolly
,
University of North Carolina-Chapel Hill

Abstract

We model leverage cycles in the natural laboratory of a mature asset class, namely US Commercial Real Estate. In this setting we can observe entrepreneurs' asset values as well as debt balance. We model capital-market yields, as conditioned by market-wide leverage, an indicator of debt availability. Using a VAR framework, we examine variance decompositions and impulse-response functions. We show that leverage constitutes the primary driver of innovations in capital-market yields and vice versa. We further find evidence for flight to quality as well as knock-on effects that affect low-leverage entrepreneurs in the market.

The Value of Daylight in Office Spaces

Andrea Chegut
,
Massachusetts Institute of Technology
Daniel Fink
,
Massachusetts Institute of Technology
Christoph Reinhart
,
Massachusetts Institute of Technology
Irmak Turan
,
Massachusetts Institute of Technology

Abstract

The presence of natural light in indoor spaces improves human health, well-being, and productivity, particularly in workplace environments. Do the social benefits of daylight translate into economic value as measured by what office tenants are willing to pay? Using a sample of 5154 office spaces in Manhattan, we pair urban daylight simulation with a hedonic valuation model to determine the marginal value of daylight in offices. Holding all other factors constant, we find that occupied spaces with access to high amounts of daylight (as measured by 55% spatial daylight autonomy) have a 5–6% value premium over occupied spaces with low amounts of daylight (as measured by less than 55% spatial daylight autonomy). We simulate the distribution of daylight on each office floor individually, taking into account architectural and location-specific characteristics. Then, using the hedonic model, we determine the added value of daylight in the office spaces. The results show, for the first time, that an estimated 74% of office spaces throughout Manhattan have low daylight, and that in a dense urban environment with differentiation in daylight levels, tenants value high daylight. Daylight value is independent of other building, neighborhood, and contract characteristics. By revealing the added value of daylight in commercial office spaces, we suggest that daylight is a key design driver and thus, should be considered in design, policy, planning, and project financing.

The True Value of Green: Separating the Wheat from the Chaff

Kevin Chiang
,
University of Vermont
Crocker Liu
,
Cornell University
Andrey Ukhov
,
University of Vermont

Abstract

This study examines the actual environmental performance compared to the eco-certification label for office buildings with respect to the behavior of tenants and landlords. Using several recently available databases on individual tenant leases, tenant profiles, building-level environmental performance and building characteristics, we are able to assess which type of tenants are willing to pay a premium for occupying green space and also the incremental rent premium associated with a “named” green label in contrast to prior studies. We find that tenants have the ability to distinguish actual environmental performance from eco-certification; i.e., separating the wheat from the chaff.
Discussant(s)
Robert Kurtzman
,
Federal Reserve Board
Timothy Riddiough
,
University of Wisconsin-Madison
Spencer Couts
,
University of Southern California
Massimo Guidolin
,
Bocconi University
JEL Classifications
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
  • G1 - General Financial Markets