Commercial Real Estate Finance

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Sheraton Grand Chicago, Huron
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Crocker Liu, Cornell University

Do Discount Rates Predict Returns? Evidence from Private Commercial Real Estate

Liang Peng
Pennsylvania State University


This paper analyzes whether investors’ discount rates predict ex post returns and Jensen’s
alpha in the private commercial real estate market. Tracking 4,430 properties in the U.S.
that were worth 127 billion dollars at acquisition over the 1997 to 2014 period, I find that
individual properties’ acquisition cap rates, which measure discount rates, have
significant predicting power for ex post returns and Jensen’s alpha. The power is robust
across property types and metro areas, is stronger in the short term, and persists when I
control for sample selection, latent factors, heterogeneous factor loadings, and the pricing
of some non-systematic risk.

Risk and Information Tranching, Security Governance, and Incentive Compatible Capital Structure Design

Jun Zhu
Freddie Mac
Timothy Riddiough
University of Wisconsin-Madison


This research shows that, in an ABS, selling the senior security at a premium to par can help manage conflicts between securityholders. In doing so the senior securityholder is less interested in liquidation, since liquidation cuts off a generous income stream that is responsible for the premium price. Continuation through (properly determined) loan reorganization thus helps preserve the income stream that causes the price premium, and consequently tilts the senior securityholder’s interests away from liquidation and towards forbearance. In the process, senior security issuance proceeds increase, as these investors feel more secure that conflicts are managed, which causes subordination levels to decrease and therefore issuance proceeds to increase. The theory generates a number of empirically testable implications, First, our model predicts the existence of both super senior and at-the-margin AAA-rated securities. The model also predicts that the junior securityholders control liquidation-reorganization decisions, since they have the information required to make efficient decisions conditional on borrower default. We also see senior securities priced at a premium to par, as predicted by the model. Premium-to-par pricing is more common during the 2004 to 2006 timeframe, which coincides with a robust property market. This type of pricing is much less prevalent in 2007 when market conditions began to deteriorate. These results are also consistent with model predictions, where higher coupon payments are required in stronger markets in order to reduce the propensity to excessively reorganize when liquidation might be a better option (at relatively low expected liquidation discounts) with inferior incumbent owner-managers. Weaker property markets do not require higher coupons, since liquidation is likely a poor alternative given current and expected market conditions. Finally, we also show that more diversified asset pools and asset pools with more management intensive collateral require lower coupons, as predicted by the model.

The Financial Benefits to Occupants of Environmentally-Certified Buildings

Avis Devine
University of Guelph
Qingqing Chang
Office of the Comptroller of the Currency


Much research has been completed on income and valuation premiums to owners and operators of sustainable and energy efficient (SEE) real estate. However, little work examines the business benefit to the space users, outside of decreased costs for office uses. Such implications for space users are of utmost interest, as tenants may be unwilling or unable to pay a rental rate premium for SEE-certified space if there is not an associated user benefit. As location-specific income data is difficult to obtain, this research utilizes a novel proxy, retail bank branch deposits, to provide the first measures of SEE business benefit. Through an examination of deposit growth, it is determined that LEED certified branches have not only an increased probability of above-market-rate deposit growth, but also experience notably higher year-over-year deposit growth. Energy Star certification is also analyzed and found to offer little income-increasing benefit to the space user. These results are tested in an event study which validates the findings, and further indicates that the benefits of LEED extend years past initial certification, evidencing lasting income-related benefits of LEED certification for space users.

The Pricing of Spatial Linkages in Companies’ Underlying Assets

Bing Zhu
University of Regensburg
Stanimira Milcheva
University of Reading


Spatial linkages in returns have not yet received much attention in an asset pricing context, however, they can capture important information about returns in a lemons market with heterogeneous assets such as real estate. We explain abnormal returns of real estate companies by modelling the spatial comovement across their underlying assets. We connect stocks using the location of their underlying assets, the properties. We show that the degree of spatial comovement across the underlying assets explains the variation in abnormal returns, controlling for exposure to systematic return factors. We propose a trading strategy which exploits the information contained in the spatial linkages of the underlying assets. We show that a long-short hedge strategy exacerbates this excess comovement in returns. An investment strategy which buys the stocks that experience an increase in their price if their connected stocks have also gone up and sells the stocks that experience a drop if their connected stocks have also gone down can earn a non-market return of an annual 12%.
Andrey Ukhov
Cornell University
Andreas Christopoulos
University of Texas
Antonio Bento
University of Southern California
R. Kelley Pace
Louisiana State University
JEL Classifications
  • G1 - Asset Markets and Pricing
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location