Commercial Real Estate
Paper Session
Saturday, Jan. 6, 2024 10:15 AM - 12:15 PM (CST)
- Chair: Spencer Couts, University of Southern California
Tenant Satisfaction and Commercial Building Performance
Abstract
Information asymmetry between landlords and tenants can significantly contribute to inefficiencies in the real estate market. Tenants' satisfaction with the building is a typical private information, which are opaqued to landlords without investigation. However, there is presently a dearth of studies evaluating the economic importance of this information, which could implicitly indicating their willingness to pay and demand for office space and critical for landlords to formulate targeted strategies to enhance property performance. In this study, we use a unique dataset combining the largest tenant survey of U.S. office tenants with rental contracts retrieved from CoStar to estimate how tenant satisfaction shapes their demand for office space. Our sample includes 2,906 U.S. office buildings and 46,075 corporate tenants. We document that a 1-point increase in tenant satisfaction (on a Likert scale of 1 to 5) is positively correlated to an 8.62\% higher willingness to renew the lease; an 11.52\% higher likelihood to recommend the property to prospective tenants; and a 14.62\% lower probability of moving out of the property. In addition, the analysis of the financial performance of properties shows that a 10\% higher building-level average satisfaction among the tenants in the building is associated with a 0.18\% higher growth of gross rents; a 0.86\% higher growth in effective gross rent; and a 0.3\% drop in the vacancy rate change. Heterogeneity analyses suggest that the role of satisfaction is strongest for short-term tenants and those properties located in submarkets with low vacancy rates. Our research provides novel evidence for the financial implication of customer relationship management in the real estate sector.The Price Discount of Distressed Commercial Real Estate Sales
Abstract
Resolved distressed commercial real estate properties sell at substantial discounts. Using carefully filtered distressed and non-distressed sale transactions between 2001 and 2022 from the Real Capital Analytics CRE transaction database, and a repeat sales methodology, we estimate the average price discount for the five main types of CRE properties. Inter alia, we estimate Bayesian unobservable components models with smooth trends - which can handle time periods with limited or no transactions - and stochastic volatility. For all property types, the aggregate estimated discounts are large and surprisingly robust to the choice of model. They range from a value of about 27 percent for distressed apartment / multifamily property sales to 47 percent for distressed retail property sales. The estimated discounts for the other three property types – hotels, industrial and offices – are similar at about 33 percent. We also suggest how the office distress estimates may be modified to reflect the additional distress resulting from the high level of remote work post pandemic. The estimated discounts should serve as useful benchmarks for stress testing CRE portfolios and CECL calculations.Pricing the Upside Potential to Downside Risk
Abstract
The pandemic exacerbated store closings of anchor tenants whom neighborhood tenants depend on to attract customers. A landlord offers insurance called co-tenancy providing limited time rent relief and premature lease termination. We price this real option. Ex-ante, price should increase with base rent and decrease with rent abatement, lease term, bond price, and default time. Using 236 centers, we find adding a co-tenancy clause in leases increases a center’s expected sales price by $5.4 million. Having at least one co-tenancy increases the odds of selling a center more than an asking price by six times.Discussant(s)
Jordan Martel
,
Indiana University
Vrinda Mittal
,
Columbia University
Elyas Fermand
,
Santa Clara University
Franklin Qian
,
University of North Carolina-Chapel Hill
JEL Classifications
- R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location