Commercial Real Estate Prices Research Articles

You Only Lend Twice: Corporate Borrowing and Land Values in Real Estate Cycles

This paper uses a natural experiment in Japan to provide evidence of the feedback loop between corporate borrowing and commercial real estate investment emphasized in macro-finance models with collateral constraints. Japan enacted a series of reforms in the early 1980s which relaxed national regulatory constraints on the height and size of buildings. Combining originally-constructed local commercial land price indices for over 400 localities with geocoded firm balance sheets, I show that these land use deregulations generated a boom-bust cycle in corporate real estate values, borrowing, and real estate investment. Firms located in more ex ante land use constrained areas both issued more debt and invested more heavily in real estate, thus amplifying the initial positive shock to commercial real estate prices. I develop a multi-city spatial sorting model with production externalities and real estate collateral which uses the estimated reduced form effects of my local regulatory instruments on firm outcomes to assess aggregate effects of the reform. I find that the deregulatory shock to commercial real estate markets and corporate borrowing environment amplified the real estate cycle in the 1980s and led to an increased incidence of zombie lending in the 1990s.

Soaring corporate debt is a risk to global growth

▀ Corporate borrowing is accelerating as a result of the coronavirus crisis. In part, this is a healthy development as firms look to ride out a period of low or even zero sales. But it also brings potential risks to growth, especially in the longer term, including via lengthy balance sheet restructuring that hurts investment and productivity growth. ▀ In the advanced economies, we estimate the aggregate corporate debt/GDP ratio could rise as much as 10ppts in 2020, to 95% of GDP ‐ well above the 2009 peak. Debt service ratios may also rise into risky territory despite low interest rates. Risks look especially elevated in France and Canada. ▀ Evidence for both advanced and emerging economies suggests high corporate debt levels can damage growth. Highly indebted firms tend to invest less in both the near and medium terms, and some estimates suggest the rise in aggregate debt this year could cut GDP growth by up to 0.2% per year. ▀ The coronavirus crisis may also crystallise some pre‐existing risks in corporate debt. Despite government assistance, defaults by low‐rated firms have started to rise and commercial real estate prices are falling. ▀ Sectoral concentrations of risk may also be intensified and new ones created in industries hit hard by the virus like energy and consumer discretionary sectors. ▀ Emerging market corporate debt is also on the rise ‐ sharply in some cases. In some economies, this mostly reflects exchange rate effects. But negative balance sheet effects of this kind are also a risk to growth.

A Study on the Price Determinants of Commercial Real Estate in Kwang-Ju Metropolis

This study aims to examine factors influencing commercial real estate prices in Gwangju Metropolitan City, where is one of typical local major cities and has clearly different characteristics of the old downtown and the new downtown, and provide an implication. The results show that region, the number of stories, transaction area, the number of frontal road lanes, front location, use zoning, year of transaction, and year of construction influenced the sales prices. But school district, accessibility to subway stations, and crosswalk did not significantly influence commercial real estates. Among the significant variables, region, use zoning, the number of frontal road lanes, and front location had positive regression coefficients. This means the commercial real estate prices in the new downtown are higher than those in the old downtown, commercial real estates located in residential areas including quasi-residential areas are expensive, and the prices increase when there are many frontal road lanes, or they are located in front. In conclusion the sales prices of commercial real estates in Gwangju Metropolitan City are most influenced by building characteristics and locations of commercial real estates such as the number of stories and year of construction and in addition to year of transaction and use zoning, the locations of the old downtown and the new downtown affect, as well.

Comovements and Spillovers in International Commercial and Residential Real Estate Markets

To what extent do the commercial and the residential estate markets move together across different countries? Do the shocks originating in one of these markets spillover to the other markets? We answer these questions by applying a modified version of the dynamic factor model to the commercial and residential real estate prices in the Euro area, Hong Kong, Singapore and the U.S. This modified dynamic factor model decomposes the price growth in these two real estate markets into common, spillover and idiosyncratic components. The results show significant heterogeneity in the relative importance of these three components in the evolution of commercial and residential price growth across different countries and across time. Our findings suggest that the spillover from residential to commercial real estate market dominates the spillover from commercial to real estate market for all the countries in our sample. We also find that common component accounts for a large fraction of the price movements in the residential markets in the EU area and the U.S, whereas spillover and common component together explain more than two-third of the variations in Hong Kong and Singapore. We also find that the role of spillover from one market to another increased significantly during the financial crisis of 2008-09.

The impact of sale and leaseback on commercial real estate prices and initial yields in the UK

ABSTRACTThis research evaluates the impact of Sale and Leaseback (SLB) on UK commercial property prices and yields, compared with arms-length transactions. Data on 357 SLB deals and 1266 non-SLB deals are extracted from CoStar and EGI. Hedonic regressions and comparative analysis with the risk-free rate are undertaken. In addition to the SLB dummy variable, explanatory variables include building size, quality, age, sector, location and year of transaction. SLB transactions are found to occur at a statistically significant price premium, with the greatest premium occurring in the office sector. SLB properties achieve a 4.5 percentage point premium compared with the risk-free rate. The net initial yield of the SLB transaction sample is around 2 percentage points lower than for the non-SLB sample in every sector. Reasons for these differences are probed by considering the effect of WAULT and tenant covenant strength. From a vendor’s perspective, the results give an indication of the price premium they might be able to negotiate for their property compared with market prices. This will help them assess whether SLB is worthwhile compared with other available financing options. The findings of a yield reduction should help investors decide whether to engage in SLB investment.

Assessing the Resiliency of the Banking Industry to a Commercial Real Estate Price Shock

In order to assess the resiliency of the non-Dodd-Frank Act stress test (DFAST) bank holding companies (BHCs), this note uses the loan-loss rate information in the public disclosure documents from DFAST 2017 and 2018.

Capitalization rates and transaction activity in international office markets: A global perspective

Based on a sample of office markets in 33 cities across 16 countries for the period 2007–2015, this paper explores variations in commercial real estate transaction activity and asset pricing in international office markets. It is argued that there are complex interactions and feedback relationships between asset prices, transaction activity, market conditions and local institutional structures in real estate markets. Commercial real estate pricing is modelled using data on capitalization rates. The relationships found are consistent with previous research in terms of the importance of drivers such as government bond yields, yield spreads and real estate rents. Consistent with information network effects, it is also found that larger and more mature markets tend to have lower cap rates and, thus, higher asset prices. The results for transaction activity are less clear cut. Results from econometric analysis of turnover rates suggest that the same explanatory factors do not determine transaction activity to the same extent as cap rates. When purged of possible joint determinants, there is no evidence to support the view that cap rates affect market turnover rates or that turnover rates affect cap rates.

Interest Rates and Investment: Evidence from Commercial Real Estate

Interest rates in the U.S. have been at historical lows since the financial crisis in 2007 for almost a decade, which are partly meant to stimulate investments. However, a theory by Chetty (2007) suggests that, at low rates, decreasing the interest rate has little effect on investments due to the low cost of delaying investment. This paper estimates constant-quality commercial real estate pricing indices for U.S. metro areas and empirically studies how interest rates affect capital expenditures of more than 12,000 properties across time (from 1997 to 2014) and metros. The identification comes from different responses of property capital expenses across metros to the same interest rate. Results show that decreasing the interest rate has weaker stimulating effects on investments when rates are low and where property prices are high.

What Really Happens During Flight to Safety: Evidence from Real Estate Markets

Flight to safety (FTS) affects the markets for risky assets such as stocks, corporate bonds, and commodities. Yet, little is known about the effects on commercial real estate. We show that REITs offer a partial hedge against FTS, with daily total returns being less sensitive to FTS than many other industries and measures of REIT liquidity actually improving on FTS days. However, a cluster of FTS days signals a decline in economic fundamentals in the long run. We find that the odds of a drop in REIT quarterly revenue increase by 15% after an FTS cluster, ceteris paribus. This effect persists for up to four quarters. We also find that commercial real estate price appreciation is all but wiped out over up to four quarters following an FTS cluster. Our findings benefit investors by providing estimates of the short-term return and liquidity response of REITs to FTS episodes, and by documenting long-term effects on REIT revenues and real asset values.

The other (commercial) real estate boom and bust: The effects of risk premia and regulatory capital arbitrage

• Required returns mainly drive commercial real estate (CRE) capitalization rates. • CRE risk premia stem mainly from general risk premia and capital requirements. • Weakened capital requirements on CMBS mainly drove the mid-2000 s CRE price boom. • The ensuing bust was triggered by rising general risk premia in the financial crisis. • More recent rises in CRE prices mainly stem from unusually low real Treasury yields. In the 2000 s, U.S. commercial real estate (CRE) prices experienced a boom and bust as dramatic as the more widely analyzed swings in house prices and contributed significantly to bank failures. We model short-run and long-run movements in capitalization rates (rent-to-price-ratio) and risk premia for office building and apartments. In the mid-2000s’ boom, CRE prices were mainly driven by declines in required risk premia that stemmed from a weakening of capital requirements. In the bust, CRE price declines were initially driven by a jump in general risk premia and later by a tightening of effective capital requirements on commercial mortgage-backed securities (CMBS) from the Dodd-Frank Act. The subsequent recovery in CRE prices was induced and sustained by unusually low real Treasury yields. We conclude that macro-prudential regulation of leverage may help limit asset price booms by preventing sharp declines in risk premia.

Some Thoughts on Real Estate Pricing

In this article, the author examines two key aspects of commercial real estate pricing. First, the spread between interest rates and commercial real estate pricing represents the market’s consensus view on the future growth of real estate’s (unlevered) cash flow less the differential in their return premiums. Second, real estate pricing itself is examined. Real estate’s (unlevered) cash-flow yield should equal the real return requirement grossed up for inflationary effects plus the uncompensated portion of inflationary growth in future cash flows (i.e., the extent to which the expected growth of real estate’s cash flow lags the expected inflation rate). A change in interest rates resulting from a change in the expected inflation rate will not affect real estate pricing, provided the real estate markets are operating at or near equilibrium. A change in interest rates resulting from a change in the real-return requirement will directly affect real estate pricing—even when the real estate markets are operating at or near equilibrium.

Commercial Real Estate Derivatives: The End or the Beginning?

In this article, the authors argue that the development of commercial real estate derivatives is not at a dead end but rather in a starting phase marked by the ambitious introduction of futures contracts to the IPD index, which covers the U.K. commercial real estate sector, on EUREX. The authors believe that the introduction of futures in this asset class will also open new opportunities for more advanced derivatives to be traded on EUREX over-the-counter or further down the line. They highlight the importance of forward IPD curves in designing strategies that will trade not only the level of the commercial real estate prices but also the shape of this curve.

What sells in a crisis? Determinants of sale probability over a cycle and through a crash

PurposeThe purpose of this paper is to understand what affects the liquidity of individual commercial real estate assets over the course of the economic cycle by exploring a range of variables and a number of time periods to identify key determinants of sale probability.Design/methodology/approachAnalyzing 12,000 UK commercial real estate transactions (2003 to 2013) the authors use an innovative sampling technique akin to a perpetual inventory approach to generate a sample of held assets for each 12 month interval. Next, the authors use probit models to test how market, owner and property factors affect sale probability in different market environments.FindingsThe types of properties that are most likely to sell changes between strong and weak markets. Office and retail assets were more likely to sell than industrial both overall and in better market conditions, but were less likely to sell than industrial properties during the downturn from mid-2007 to mid-2009. Assets located in the City of London more likely to sell in both strong and weak markets. The behavior of different groups of owners changed over time, and this indicates that the type of owner might have implications for the liquidity of individual assets over and above their physical and locational attributes.Practical implicationsVariation in sale probability over time and across assets has implications for real estate investment management both in terms of asset selection and the ability to rebalance portfolios over the course of the cycle. Results also suggest that sample selection may be an issue for commercial real estate price indices around the globe and imply that indices based on a limited group of owners/sellers might be susceptible to further biases when tracking market performance through time.Originality/valueThe study differs from the existing literature on sale probability as the authors analyzed samples of transactions drawn from all investor types, a significant advantage over studies based on data restricted to samples of domestic institutional investors. As well, information on country of origin for buyers and sellers allows us to explore the influence of foreign ownership on the probability of sale. Finally, the authors not only analyze all transactions together, but the authors also look at transactions in five distinct periods that correspond with different phases of the UK commercial real estate cycle. This paper considers the UK real estate market, but it is likely that many of the findings hold for other major commercial real estate markets.

Assessing Commercial Real Estate Market CreditCycles and CMBS Investment Implications

U.S. commercial real estate (CRE) prices have enjoyed impressive appreciation after the global financial crisis. The important question to ask is how long this party will last and where we are in the credit cycle. This article highlights the unique characteristics of this credit cycle that distinguish it from previous ones, followed by an assessment of U.S. CRE valuations through comparisons with global peers, U.S. residential housing prices, and the historical risk premium. The author then calibrates the stages of credit cycles in which each CRE sector is situated through the lens of six-factor metrics. The author concludes with implications for commercial mortgage-backed security investors and recommends targeted investment approaches for investors.

Pricing Extreme Attributes in Commercial Real Estate: the Case of Hotel Transactions

We show that conventional hedonic models for commercial real estate prices ignore the utility investors derive from a building’s extreme attributes. Analyzing geo-enriched data on nearly 4,800 hotel transactions in the United States, we find that the relative positioning of an asset’s attributes – particularly at the extremes – has a significant impact on transaction prices. We also detect separating equilibria for extreme attributes across the premium and discount hotel segments. Extreme attributes “stand out” and are value enhancing in premium hotel segments. In contrast, extreme attributes are value diminishing in the discount hotel segment. The relative degree to which the asset’s attributes are extreme is important. Being a locally largest asset has a negative effect on price, however the negative effect is more than offset if the hotel is among the largest hotels nationally. The results suggest that locally extreme assets, unless also nationally extreme, are considered atypical and trade at a discount.

Do ‘foreigners’ pay more? The effects of investor type and nationality on office transaction prices in New York City

Are commercial real estate prices in metropolitan New York affected by the type or nationality of the investors involved in a transaction? Previous research has highlighted differences in pricing between in-state and out-of-state investors and between different types of investors, but there are few extant studies that consider the influence of nationality on pricing at a micro-level. Foreign investors might pay more than domestic investors for commercial real estate assets because of a lack of information or experience in the market concerned. However, they might use local partners or brokers to mitigate such problems. To explore these issues, we use data provided by Real Capital Analytics on over 3000 office transactions in the New York metro area from 2001 to 2015. We use hedonic regression techniques and propensity score matching to examine whether pricing differs across investor groups after controlling for asset attributes. We find that foreign investors pay more than domestic investors at acquisition, but receive more when selling assets. Tests suggest that it is unmeasured aspects of quality that explain any apparent overpayment for offices in this location, not information issues.

A Commercial Real Estate Price Evaluation Model Based on GT-BCPSO-BP Neural Network

Aimed at coping with the complexity of commercial real estate price evaluation, the advantages of grey correlation theory, bacterial chemotaxis particle swarm algorithm and BP neural network are integrated to firstly put forward a novel model of commercial real estate cost evaluation. First, grey correlation theory was used to reduce the factors affecting commercial real estate price and optimise input variables of BP neural network. Then, the bacterial chemotaxis particle swarm algorithm with constriction factors is adopted to optimise the initial weights and thresholds. Through this method, BP neural network can be used to solve nonlinear problems and to improve the rate of convergence and the ability to search global optimum. An engineering project in the city of Hunan is selected to make empirical analysis. It shows that this novel model enjoys a high practical value as it can be applied to make scientific evaluation of commercial real estate price evaluation.

A commercial real estate price evaluation model based on GT-BCPSO-BP neural network

Aimed at coping with the complexity of commercial real estate price evaluation, the advantages of grey correlation theory, bacterial chemotaxis particle swarm algorithm and BP neural network are integrated to firstly put forward a novel model of commercial real estate cost evaluation. First, grey correlation theory was used to reduce the factors affecting commercial real estate price and optimise input variables of BP neural network. Then, the bacterial chemotaxis particle swarm algorithm with constriction factors is adopted to optimise the initial weights and thresholds. Through this method, BP neural network can be used to solve nonlinear problems and to improve the rate of convergence and the ability to search global optimum. An engineering project in the city of Hunan is selected to make empirical analysis. It shows that this novel model enjoys a high practical value as it can be applied to make scientific evaluation of commercial real estate price evaluation.

Shuffling Through the Bargain Bin: Real Estate Holdings of Public Firms

Using a novel and detailed transaction-level data set of commercial real estate assets, we construct real estate asset portfolios for a comprehensive set of public firms between 2000 and 2013. We find that bank loan spreads incorporate information not only on the alternative uses of a borrower's real estate portfolio, but also on the number of that portfolio's potential buyers. Using surges of foreign investor demand from countries with increased policy uncertainty and also local land-supply elasticity information, we identify plausibly exogenous shocks to commercial real estate prices. We find that, after a region experiences large foreign investor demand, loan spreads become less sensitive to collateral value of real estate holdings.

Interest Rates and Investment: Evidence from Commercial Real Estate

Interest rates in the U.S. have been at historical lows since the financial crisis in 2007 for almost a decade, which are partly meant to stimulate investments. However, a theory by Chetty (2007) suggests that, at low rates, decreasing the interest rate has little effect on investments due to the low cost of delaying investment. This paper estimates constant-quality commercial real estate pricing indices for U.S. metro areas and empirically studies how interest rates affect capital expenditures of more than 12,000 properties across time (from 1997 to 2014) and metros. The identification comes from different responses of property capital expenses across metros to the same interest rate. Results show that decreasing the interest rate has weaker stimulating effects on investments when rates are low and where property prices are high.