Commercial Real Estate 1
Paper Session
Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)
- Chair: David Ling, University of Florida
Up (or Down) in Smoke: Air Pollution and Demand for Space
Abstract
We investigate how air pollution impacts Commercial Real Estate (CRE) markets by analyzing the effects of far reaching transient wildfire smoke. Combining satellite smoke plume data with office rents and lease term length on new contracts, we find that increased exposure to heavy smoke leads to lower rents and shorter lease terms. Building quality is a significant sources of heterogeneity in this effect. We observe downward pressure on rents and term length predominately for existing buildings (not new developments) and class B/C properties. Class A buildings are somewhat shielded from the rent declines while new developments see rent appreciation. Additionally we find that buildings exposed to lower levels of heavy smoke historically also see significant declines in rent and lease term length with increased heavy smoke exposure. No effect is found for buildings exposed to higher levels of heavy smoke historically. In general, the effect on rents and term length occurs in the short to medium term---within 6 months of exposure. However, given that office lease contracts range from 5 to 10 years, the downward pressure on rent is long-lasting.Are Cap Rates Derived from Capital Markets Good Proxies for Space Market Cap Rates?
Abstract
This paper is the first to examine if cap rates derived from capital markets are a good proxy for space market cap rates. Using quarterly mortgage loan data from the American Council of Life Insurers from 2000 through 2023 (96 quarters 24 years), we find that capital market cap rates and space market cap rates are highly correlated (95%) and that capital market cap rates are consistently higher. The consistency suggests that the two series may be cointegrated, allowing one series to predict the values of the other. Using tests for cointegration, we find that capital market cap rates and space market cap rates are cointegrated; consequently, we use an error correction model to predict space market cap rates from capital market cap rates. Because error-corrected capital market cap rates are good proxies for space market cap rates, these values may be used to estimate property value reliably when space market cap rates are not readily available. Another benefit of error-corrected capital market cap rates is that they allow for the calculation of the expected equity dividend rate (cash-on-cash return), the expected equity yield rate, and the expected overall yield rate (IRR).Work-From-Home, COVID-19, and Online Retail Effects on Commercial Real Estate Prices
Abstract
This study decomposes the effects of changes in required rates of return and expected rent growth on average national prices for the four major types of commercial property. Results imply that work-from-home has raised capitalization rates for top-end commercial offices enough to lower equilibrium prices by 19 percent. While the rise of online shopping appears to have lowered warehouse cap rates enough to boost prices by 16%, we do not find a discernible effect on apartments or retail power centers. We also find that capitalization rates react quickly to changes in required rates of return; however, the latter tends to respond with a lag to factors affecting risk premia. Finally, we find that prime offices and apartments remained overvalued by 13 and 25 percent, respectively, at year-end 2023. The potential degree of apartment overvaluation is noteworthy. In contrast, prices for top quality warehouses and retail power centers were near current long-run fundamentals.Discussant(s)
Nils Kok
,
Maastricht University
Cameron LaPoint
,
Yale University
David Ling
,
University of Florida
Ricardo Lopez
,
Syracuse University
JEL Classifications
- R0 - General