Commercial Real Estate Research Articles

Compilation of Commercial Property Price Indices for Germany Tailored for Policy Use

Abstract The compilation of commercial property price indices (CPPIs) is challenging. Policymakers urge for timely, reliable and comprehensive data. In Germany, lack of data prevents the calculation of official figures by the national statistical authority. Different applications of price indices need different definitions of commercial real estate. CPPIs according to these definitions are constructed on the basis of existing data for 127 German towns and cities (that cover about one-third of German population). The overall price developments revealed by the various indices are rather similar in terms of central time series characteristics, while differences in detail can be explained by their specific compositions. Price increases for all definitions have been strongest in the seven largest cities. The definitions tend to lead to more marked differences for medium-sized towns.

The Increasing Trend in Commercial Real Estate Lending by Community Banks: The Role of Deliberate Risk-Taking, 2001-2017

Much attention focuses on the role of real estate lending by banks as a precipitating factor in past financial crises, and especially with respect to the 2007-2008 crisis. Over the past five years, U.S. banks have increased their commercial real estate lending dramatically, raising concern among regulators about the potential for another financial crisis. In this paper, we analyze post-recessionary trends to determine whether the same dangerous pre-recessionary risk-taking trends are emerging. Regulators devote most of their attention to the banking sector with little regard to the role played by its various subgroups. This may explain why there is little research analyzing the specific role of community banks in sparking a financial crisis. In this study, we present a disaggregated analysis that focuses on the potential risks of increased commercial real estate lending from a comparative perspective, examining community banks vis-a-vis larger banking institutions, paying particular attention to the role of deliberate bank risk-taking as a causal factor in increased community bank commercial real estate CRE lending since the Great Recession.

Teaching Legal Elements of Commercial Real Estate Leases to Business Undergraduate Students Through an Interactive Experiential Learning Exercise

Teaching Legal Elements of Commercial Real Estate Leases to Business Undergraduate Students Through an Interactive Experiential Learning Exercise

What influences real estate volatility in Hong Kong? An ARMA-GARCH approach

PurposeThis paper aims to examine real estate price volatility in Hong Kong. Monthly data on housing, offices, retail and factories in Hong Kong were analyzed from February 1993 to February 2019 to test whether volatility clusters are present in the real estate market. Real estate price determinants were also investigated.Design/methodology/approachAutoregressive conditional heteroscedasticity–Lagrange multiplier test is used to examine the volatility clustering effects in these four kinds of real estate. An autoregressive and moving average model–generalized auto regressive conditional heteroskedasticity (GARCH) model was used to identify real estate price volatility determinants in Hong Kong.FindingsThere was volatility clustering in all four kinds of real estate. Determinants of price volatility vary among different types of real estate. In general, housing volatility in Hong Kong is influenced primarily by the foreign exchange rate (both RMB and USD), whereas commercial real estate is largely influenced by unemployment. The results of the exponential GARCH model show that there were no asymmetric effects in the Hong Kong real estate market.Research limitations/implicationsThis volatility pattern has important implications for investors and policymakers. Residential and commercial real estate have different volatility determinants; investors may benefit from this when building a portfolio. The analysis and results are limited by the lack of data on real estate price determinants.Originality/valueTo the best of the authors’ knowledge, this paper is the first study that evaluates volatility in the Hong Kong real estate market using the GARCH class model. Also, this paper is the first to investigate commercial real estate price determinants.

Transfer Pricing Aspects of Real Estate Financing

There has been a lot of interest in the transfer pricing of intercompany loans recently, especially following the new guidance released by the OECD on financial transactions in February 2020. However, there are no specific details on the financing of real estate in this new guidance, although in practice the financing of real estate has some unique characteristics. In this article, the authors highlight several aspects that are specific to real estate financing and their impact on transfer pricing. The focus is mainly on investments by multinational enterprises in commercial real estate (CRE), i.e. income-producing property used solely for business purposes, rather than residential property. Examples of CRE include retail malls, shopping centres, office buildings and hotels.

Priorities for the COVID-19 pandemic at the start of 2021: statement of the Lancet COVID-19 Commission

Priorities for the COVID-19 pandemic at the start of 2021: statement of the Lancet COVID-19 Commission

Valuing sustainability in real estate: a case study of the United Arab Emirates

PurposeThe purpose of this paper is to determine if there is an impact of sustainability on the market in terms of a green premium or a brown discount on the price of commercial and residential real estate. It also seeks to identify the incentives and barriers for sustainable developments perceived by real estate professionals.Design/methodology/approachThe paper investigates the impact of sustainability features on the valuation of buildings in the United Arab Emirates (UAE). The study uses a qualitative structured questionnaire to determine the views of certified real estate valuers and advisors on this subject.FindingsThe results suggest a green premium of at least 1% in the UAE, coming from both supply-side and demand-side, and in commercial and residential sectors. Key barriers for the recognition of green building value include availability of reliable market data, lack of relevant technical skills and apparent client disinterest. Initiatives that would encourage green buildings include financial incentives for key stakeholders, raising and enforcing building standards, and higher energy prices. This paper identifies policy measures that local authorities may consider in transforming to a more sustainable economy. It is expected that such changes would convey to the real estate industry and affiliated stakeholders the financial benefits to be gained from investing in green buildings.Research limitations/implicationsThe UAE is not a transparent environment in terms of building prices and rents, and it can be challenging even for experienced professionals to determine whether an observed higher value can truly be considered a green premium. The second issue is that the results may be affected by a “voluntary response bias”, whereby recipients who are interested in sustainability are more likely to have responded to the survey.Practical implicationsThis paper identifies policy measures that local authorities may consider in transforming to a more sustainable economy. It is expected that such changes would convey to the real estate industry and affiliated stakeholders the financial benefits to be gained from investing in green buildings.Originality/valueMost research exploring the value of green buildings originates from developed economies and its applicability to the Middle East is questionable due to its differing origins and unusual development path. This article offers new insights into an under-researched market.

2020 Office Quarantine

The hotel and retail sectors have been at the forefront of COVID-19-related investor concerns in commercial real estate. The office sector is the single largest property sector across commercial mortgage-backed securities with $149bn of outstanding balances across conduit and single asset, single borrower. Office sector delinquencies have remained relatively low through the COVID-19 crisis; however, COVID shutdowns have forced many corporations to shift to work from home (WFH) situations across the US. The success of WFH and the potential to reduce corporate occupancy costs may have longer term implications on office demand beyond the pandemic. This article reviews the health of the office sector, looks at office performance during the Great Financial Crisis, and considers the impact of wider acceptance of WFH policies on future office demand. <b>TOPICS:</b>CMBS and commercial mortgage loans, credit risk management, financial crises and financial market history <b>Key Findings</b> ▪ Office commercial mortgage-backed securities (CMBS) delinquencies to date have remained relatively low compared with the hotel and retail sectors. ▪ The office sector does not face significant near-term deadlines. Office debt maturities and lease rolls in CMBS are back-ended. Only 10% of office debt maturities (conduit) and 18% of reported lease rolls in CMBS are due in the next 2 years. The duration of office leases provides a longer runway for problems to be worked out. ▪ During the Great Financial Crisis (GFC), office revenues declined by roughly −17% and did not bottom for about 2½ years. Milder recession than the GFC; WFH acceptance has dented office demand, but this will be partly offset by higher square footage per employee needs once offices can reopen normally. Longer term office demand will return.

Earth, Wind, and Fire: PACE Plays a Vital ESG Role

Interest in environmental, social, and governance–focused investments has been on the rise as investors look to address critical issues such as climate change, diversity, human rights, and company stewardship, to name a few. At the same time, sustainable investing is at an inflection point. As attention shifts away from how people invest, the focus is migrating to the outcomes of those decisions, such as thinking proactively about how our actions affect the environment. Initially, environmental concerns were addressed primarily through exclusionary practices and avoidance of investments in industries that were deemed harmful to the planet. However, the dialogue has evolved to include more proactive measures with outcomes, including reduction in greenhouse gas emissions, water conservation, and air quality improvement. As property owners look to make building upgrades addressing energy efficiency, renewable energy, water conservation, HVAC concerns, and resiliency measures, property assessed clean energy programs can play a vital role in financing such initiatives. <b>TOPICS:</b>ESG investing, other real assets, legal/regulatory/public policy <b>Key Findings</b> ▪ Two main catalysts are driving momentum in the property assessed clean energy (PACE) sector. Legislation is a major force behind the growth seen in PACE. Second, increased focus on environmental, social, and governance initiatives, for both entities and investors, is another driving factor. ▪ Commercial PACE has picked up momentum as more property owners become aware of PACE and find it to be an attractive addition to the capital stack for financing qualified building improvements aimed at addressing climate change and natural disaster concerns. ▪ Interest in new construction and gut rehabilitation commercial PACE has been rising. Four components encapsulate DBRS Morningstar’s risk analysis for commercial real estate projects: environmental, construction progress, strength of the sponsor, and the first mortgage lender.

Understanding green building energy performance in the context of commercial estates: A multi-year and cross-region analysis using the Australian commercial building disclosure database

To understand the relationship between green building energy performance and regional commercial estates, this study analysed Australia’s Commercial Building Disclosure (CBD) program database. This database discloses the annual energy use intensity (EUI) and the corresponding energy rating (1–6 stars) of 2460 National Australian Built Environment Rating System (NABERS) certified office buildings. The study selected for analysis Australia’s six largest cities and then used panel data regression, where commercial estate factors (total stock of office buildings, vacancy rate, average gross face rent, and government incentives such as financial support) served as independent variables and the EUI was the dependent variable. The p-values of all the models are below 0.05, indicating that the results are statistically significant. Results showed the commercial real estate factors were significantly related to the EUI for buildings with a rating of 1 star and above. The correlation between EUI and commercial real estate factors became less strong with the rating level increasing. The effect of ‘green building’ branding makes the office buildings more attractive with regard to tenancy and their energy performance more reflective of the variation in the commercial real estate market. This study is a frontrunner in contextualising green building energy performance and ratings in the context of regional commercial estate, and the regression models employed in the study could be used to define regional baselines for energy ratings in future studies.

The More, the Emptier: The Consequences of Growing Concentration in Urban Office Space in Poland

ABSTRACT The paper identifies and measures the economic consequences of the rapid saturation of commercial real estate markets in Poland. We document a negative link between the growing concentration of office buildings in the Polish real estate submarkets and building-level vacancy rates. Slower absorption in the areas that are more densely built up is accompanied by lower asking rents. The impact of saturation in real estate markets on building-level fundamentals is heterogenous across different classes of real estate assets, and high-quality buildings are less vulnerable than the low-quality buildings. Our findings demonstrate that higher density in office space harms investors.

The effect of sentiment on commercial real estate returns: investor and occupier perspectives

PurposeReal estate is an asset that is traded in highly segmented, illiquid and informationally inefficient local markets. A short sale in real estate is almost infeasible and therefore impedes informed rational arbitrageurs to trade against mispricing. Thus, real estate returns are prone to sentiment-driven behaviours. Will the impacts on asset returns be identical for different types of sentiment?Design/methodology/approachThis study argues that not all sentiment effects are created equal. Using the bounds test of the autoregressive distributed lag (ARDL) models, this paper examines how occupier sentiment versus investor sentiment contributes to the short-run and long-run dynamics of commercial real estate returns in Australia.FindingsThe empirical evidence suggests that investor sentiment and occupier sentiment influence return asymmetrically after macroeconomic conditions are controlled for.Practical implicationsThe sectoral analysis further reveals that sector-specific sentiment plays a significant role in explaining commercial real estate returns. Furthermore, notable improvement is found in producing more accurate prediction in returns, given that measures of occupier and investor sentiment are appropriately specified in the forecast.Originality/valueThis study is novel in the sense that it acknowledges the impacts of occupiers' and investors' sentiment may be fundamentally different. The unique innovation and contribution of this study to behavioural finance literature are based on a new dataset from the Royal Institute of Chartered Surveyors which includes a survey-based measure of investor sentiment and occupier sentiment.

Influence of Rail Transit on Development Patterns in the Mountain Mega-Region with a Surprise and Implications for Rail Transit and Land-Use Planning

Between 2020 and 2050, all states comprising the Mountain Mega-Region (MMR—Arizona, Colorado, Nevada, New Mexico, and Utah) will be among the top 10 fastest growing U.S. states. They also have among the nation’s largest shares of land area in federal, state, public, and tribal land ownership. This has led to concentrations of populations in their metropolitan areas. Indeed, in 2020, the metropolitan areas of more than one million residents—Albuquerque, Las Vegas, Phoenix, Salt Lake City, and Tucson—comprise more than 70% of their states’ populations. With rapid growth combined with land constraints, many of these metropolitan areas are using rail transit systems to help meet transportation needs while also influencing development patterns in intended ways. If they are effective, these rail transit systems will: (a) create commercial real estate rent premiums; (b) attract jobs; and (c) attract households to areas near rail stations. We report the effectiveness of MMR rail transit systems in each of these respects. We also present a surprise: Contrary to conventional wisdom, it is households with children that locate closest to rail stations than single persons and childless households. We reason that improved planning is needed to meet the market demand for development throughout the half-mile circle around transit stations in the MMR’s metropolitan areas. If this can be done, all development in these MMR metropolitan areas may occur near rail transit stations.

Dynamics of commercial real estate market segments in the post-pandemic period

Research background: Commercial real estate segments have reacted differently to the effects of the coronavirus pandemic, announced early last year. Thus, the greatest interest is represented by commercial, service and warehouse real estate. The retail segment seriously felt the restrictions in the work of retail and service enterprises from March to July 2020 – due to the rotation of operators, the departure of many players from the market, the vacancy rate of space increased, the average rental rate decreased due to the revision of lease agreements. Warehouse real estate, on the contrary, has received incentives for development due to a twofold increase in online trade in Russia – the vacancy rate in the most high-quality areas tends to 0-2%, the average rental rate is growing rapidly. Purpose of the article: to analyze the commercial real estate market in the context of retail and warehouse real estate in the regions of Russia and St. Petersburg, to develop mechanisms to increase their competitiveness in the postcovid period. Methods: description, comparison, analogy, generalization and correlation and regression analysis. Findings &amp; Value added: there is a high dependence of the current state of retail and warehouse real estate on the growing volumes of online trade, which causes certain trends: the growth of the shortage of warehouse space and the increase in the vacancy rate of retail space-mechanisms have been developed to increase the competitiveness of commercial real estate operators in St. Petersburg and the regions

ИНВЕСТИЦИОННО-КРЕДИТНЫЙ МЕХАНИЗМ ИПОТЕЧНОГО КРЕДИТОВАНИЯ КОММЕРЧЕСКОЙ НЕДВИЖИМОСТИ

Consumer demand for commercial real estate currently remains low due to both low incomes of the population and the lack of investment attractiveness of commercial real estate. These factors have a negative impact on the commercial real estate market in general and cause an overstocking of the sales market in particular. The article gives a recommendation to improve the conditions for mortgage lending in Russia, which consist in carrying out the following measures: expanding the composition of banking assets, the main factor for the implementation of which is the standardization of banking products for the purpose of free sale on the market or pledging for attracted loans in a situation of liquidity shortage; introduction of a long-term bank deposit; introduction of the scheme "long assets - long liabilities", which consists in issuing mortgage loans at the expense of loans in the secondary market by issuing their own mortgage bonds; introduction of securitization; creation of an information base of market parameters for real estate transactions. Also, an investment and credit mechanism has been formed, aimed at expanding opportunities for investing in commercial real estate, developing the commercial real estate market and attracting small and medium-sized businesses. The developed mechanism included three stages: conclusion of a preliminary loan agreement; conclusion of a mortgage lending agreement; attracting investors. As a result of the introduction of the investment and credit mechanism, the following results were obtained: the possibility of reducing the amount of the mortgage loan, reducing the monthly payment, reducing the final cost of the loan, reducing the risk of insolvency of the client, ensuring the investment attractiveness of commercial properties.

Does Climate Change Affect Investment Performance? Evidence from Commercial Real Estate

Combining granular data on temperatures across the continental US with micro-level commercial real estate (CRE) data from 1991 to 2020, we study the impact of exposure to extreme temperature shocks on investment performance of CRE at the individual asset level. We find that exposure to extreme temperatures significantly reduces average realized total returns in CRE. This result is driven by reduction in asset returns. We do not observe a significant effect of income return. We document substantial variation in sensitivity to temperature shocks across property types. Our results seem to be driven by shocks to time-varying CRE risk premium due to decreased predictability of future rental income.

Commercial Real Estate and Macrofinancial Stability During Covid-19

The COVID-19 pandemic crisis has severely shocked the commercial real estate (CRE) sector, which could have important implications for macro-financial stability going forward because of the large size of the sector and its strong interconnectedness with the real economy. Using a novel methodology, this paper quantifies vulnerabilities in the CRE sector and analyzes policy tools available to mitigate related risks. The analysis shows that CRE prices were overvalued in several major advanced economies in 2020:Q1. It also shows that such price misalignments increase the likelihood of future price corrections and exacerbate downside risks to future GDP growth. While the path of recovery in the sector will depend inherently on the pace of overall economic recovery and the structural shifts induced by the pandemic, easy financial conditions may contribute to an increase in financial vulnerabilities and persistent price misalignment. Macroprudential policy can, however, be effective in curbing the financial stability risks posed by the CRE sector.

Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets

The collateral channel, whereby an increase in residential house prices leads to an increase in commercial property prices, loosening firm borrowing constraints and increasing firm investment, is weaker when residential and commercial real estate are imperfect substitutes. We enrich the DSGE model of the collateral channel in Liu, Wang, and Zha (2013) by adding a land development sector to allow residential and commercial land to be imperfect substitutes. Bayesian estimation of our structural model based on aggregate U.S. data indicates imperfect substitution between the two types of land. With variance decompositions and impulse responses, we show that the strength of the collateral channel linking residential house prices and firm investment is weaker when the two types of land are imperfect substitutes. When residential and commercial land are assumed to be perfect substitutes, shocks to residential real estate demand explain 20-30% of the variance of total output and 30-40% of the total investment, but with the imperfect degree of substitution that we estimate, the same shocks explain less than 10% of the variance of output and 12-15% of investment.

Methodology for making decisions in managing commercial real estate

The purpose of this paper is to develop guidelines for the formation and implementation of a decision-making mechanism for managing commercial real estate. As a result of the study, the current trends in the development of the real estate market are revealed, the methods and established practice of the activities of management companies are analyzed, the analysis of theoretical approaches to the management of commercial real estate is carried out. On the basis of theoretical and methodological principles and the specifics of the analyzed area of research, methodological recommendations are proposed for the formation of a mechanism for managing commercial real estate, including a method for assessing their investment attractiveness.

Daily Appraisal of Commercial Real Estate A New Mixed Frequency Approach

We present a mixed frequency repeat sales model for commercial real estate, taking into account changes in net operating income between the date of buying and selling the property. Moreover, we relate monthly private market index asset returns to lags, up to one year, of daily REIT returns. The underlying REIT model enables us to interpolate the monthly private market index returns on a daily basis, and to predict the private market index asset returns going forward. The mixed frequency repeat sales model facilitates daily appraisal of commercial real estate portfolios. We apply the model on sale prices (all property types, and apartments only) in the period January 2006 up to July 2020, provided to us by Real Capital Analytics. We find that the mixed frequency repeat sales model reduces one-month-ahead forecasts errors and index revisions, compared to a benchmark model without daily REIT returns.