« Back to Results

REITs and Commercial Real Estate Investments

Paper Session

Saturday, Jan. 7, 2023 8:00 AM - 10:00 AM (CST)

Sheraton New Orleans, Bayside B
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Andreas Christopoulos, Yeshiva University

Granular Property Shocks and Commercial Real Estate Returns

David C. Ling
,
University of Florida
Chongyu Wang
,
University of Hong Kong
Tingyu Zhou
,
Florida State University

Abstract

The relation between private and public commercial real estate (CRE) returns has been studied extensively. The existing studies focus on the return correlation between private and public markets or the ability of one market to predict returns in the other. However, no prior study has established a causal relation between returns in these parallel CRE markets. We construct a new measure of idiosyncratic shocks to private real estate markets, granular property shocks (GPS). We show that this unexpected return risk in local property markets is subsequently capitalized into the prices of listed CRE companies. To establish causality, we adopt the Granular Instrumental Variable (GIV) approach recently developed by Gabaix and Koijen (2020, 2021). This approach allows us to isolate exogenous variation in the performance of the local markets in which a CRE manager invests that is independent of firm-manager factors. Our results suggest that idiosyncratic shocks from granular, private CRE markets, instrumented by the GIV, have a large and significant effect on listed REIT returns. Specifically, a one-standard-deviation increase in GPS predicts a 1.34% rise in quarterly REIT returns, which is 40% of its mean value.

On the Value of Information Signals by Peer Investors: Evidence from Commercial Real Estate Redevelopment

Simon Camilo Buechler
,
Massachusetts Institute of Technology
Alex van de Minne
,
University of Connecticut
Olivier Schöni
,
Laval University

Abstract

We investigate how institutional commercial real estate investors adapt their investment decisions according to tangible localized information signals provided by other peer investors. We find that investors are more likely to implement buy-to-redevelop strategies in a given area when recent investments signal the existence of a capital intensity gap and economic activity mismatch between older buildings and newly built ones. Our analysis shows that investors deem these information externalities valuable. Ceteris paribus, when real estate investments signal obsolescence of the existing stock, investors are willing to pay up to 30% more to acquire a property for redevelopment. Our findings contribute to the literature on the pricing of information signals by peers and provide insights for policymakers to stimulate commercial real estate investments and urban renewal.

Sustainability and Private Equity Real Estate Returns

Avis Devine
,
York University
Andrew Sanderford
,
University of Virginia
Chongyu Wang
,
University of Hong Kong

Abstract

This paper explores private equity real estate fund performance and voluntary environmental, social, and governance (ESG) disclosures. Using data from the National Council of Real Estate Investment Fiduciaries (NCREIF), it examines the relationship between performance for funds in the Open Ended Diversified Core Equity (ODCE) Index and reporting to the Global Real Estate Sustainability Benchmark (GRESB), a platform for disclosure about fund/firm-level ESG strategies. The empirical analyses suggest four conclusions. First, there has been substantial adoption of and reporting to GRESB in the last 5 years, suggesting that reporting to GRESB is a form of table stakes for ODCE members. Second, GRESB participation and performance are both significant predictors of cross-sectional fund returns. Third, GRESB participation and performance are associated with the price appreciation component of fund total returns but not with the income component. Fourth, the relationships between fund returns and GRESB participation and scores are independent of local economic conditions. These results close an important gap in the literature about private equity real estate fund performance and ESG/climate change mitigation efforts in commercial real estate markets.

The Impacts of Climate Risk on Commercial Real Estate: Evidence from REITs

Zifeng Feng
,
University of Texas-El Paso
Ran Lu-Andrews
,
California Lutheran University
Zhonghua Wu
,
Florida International University

Abstract

Though climate risk has been recognized as a material risk in finance and residential real estate, there is limited research on how climate risk affects commercial real estate markets. To enrich such understanding, in this research, we construct a firm-level climate risk measure based on the county-level temperature data from National Oceanic and Atmospheric Administration (NOAA) and an extensive property-level data set of U.S. equity REITs from 1995-2020. The impacts of climate risk on commercial real estate are then examined at the firm-level. We find that REITs with higher climate risk exposures (i.e., with more properties located in counties experiencing higher abnormal temperature changes) tend to have lower cash flow and firm values. The negative impacts from climate risk are robust with various model specifications and control variables. This article contributes towards a better understanding of the economic implications of rising temperatures on commercial real estate and provides empirical support to the temperature-based long-run risk model.

Discussant(s)
Roland Fuess
,
University of St. Gallen
Gianluca Marcato
,
University of Reading
Alexander Phillip Eduard Carlo
,
Maastricht University
Erkan Yonder
,
University of Concordia
JEL Classifications
  • R1 - General Regional Economics