Commercial Real Estate 1
Paper Session
Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)
- Chair: David Ling, University of Florida
Smoked Out: Impact of Wildfire Smoke on Labour and Buildings
Abstract
We investigate how air pollution impacts office buildings and workers by analyzing theeffect of far reaching transient wildfire smoke on rent, lease term length and worker
productivity. 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 (new, high quality) mitigates some
of the negative effect on rents associated with wildfire smoke exposure. 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. We additionally
find evidence that the negative effect of smoke exposure on worker productivity is a
significant channel for our findings. 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 uses error correction and tax adjustment methods to derive capitalization rates from capital markets to 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 are highly correlated and consistently higher than space market cap rates. The high correlation suggests that the two series may be cointegrated, allowing one series to predict the values of the other. Using cointegration tests, 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. We also find that the adjusting for depreciation tax deduction in the capital market cap rates accounts for most of the variation between the two cap rate series, providing another way for using capital market cap rates to proxy for space market cap rates when property level data are sparse or unavailable.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