The Economics of Maintenance for Real Estate Investments

We propose a theory of urban decay. Following a negative real estate demand shock, property managers optimally suspend maintenance and the probability that they ever restart can be modest. Because maintenance expenditures are proportionately less risky than are the incremental building profits they generate, managers impose a more demanding profit standard on maintenance than on the initial investment. This differential in profit standards means that rather than maintain existing investments, property managers favor new investments, which, if marginally acceptable, they also leave unmaintained. Contractually required maintenance ( e.g ., for publicly subsidized real estate investments), increases the minimum profit for the initial investment acceptance and discourages subsidized real estate investments in favor of unsubsidized investments. However, the required profit for acceptance of a permanently maintained investment is below the profit boundary for maintenance if maintenance is not contractually required. Consequently, the subsidy that induces the investment is least expensive if maintenance is not required, more expensive if maintenance is permanently required and most expensive if maintenance is induced immediately after initial construction but thereafter is at the discretion of the manager. All of our findings are strongest for poorer quality properties.     

Discrimination Against Prounion Job Applicants

This study analyzes 95 unfair labor practices involving pre-employment discrimination against union adherents. The cases were heard either by the National Labor Relations Board or U.S. Court of Appeals between 1976 and 1986. Nonsupervisory, unskilled applicants who suffer preemployment discrimination by employers that display antiunion sentiments during union organizing campaigns have a lower probability of winning their cases than to skilled applicants. Pre-employment screening of job applications with prounion backgrounds or attitudes is often part of a larger pattern of unfair labor practices by management. The Dotson administration also supported management's rejection of prounion applicants at a significantly higher rate than did other NLRB administrations.     

Leasing as a Lottery: Implications for Rational Building Surges and Increasing Vacancies

An expanded inventory demand framework is developed that focuses on the impacts of changes in the local leasing environment. We model the lease-up process as a lottery in which changes in turnover or absorption affect the probability of winning the leasing lottery. In this context, builders rationally respond to transitory, not just permanent, changes in the local market. Hence, factors such as temporary shocks to tenant turnover affect the decision to build. The magnitude of turnover-induced cycles can vary across markets depending upon the vintage of the existing building stock, the local absorption rate and the rent elasticity of demand for space. This framework, which refocuses attention on the local determinants of the developer's decision to build, hopefully will prove fruitful in future empirical efforts to explain development and vacancy behavior during the past decade.     

Government fertilizer subsidy and commercial sector fertilizer demand: Evidence from the Federal Market Stabilization Program (FMSP) in Nigeria

We examine how the previous fertilizer subsidy program in Nigeria (FMSP) affected the demand for commercial fertilizer. We apply an endogenous double hurdle model to a pseudo-panel and cross-section data of farm households. The methodology accounts for potential endogeneity of commercial fertilizer price with subsidy. Our specification is also appropriate where few farmers report the use of both subsidized and commercial fertilizer. We find that 100 kg of subsidized fertilizer supplied to a farm household reduced the probability of its participation into commercial fertilizer market by 10–21% points, while not affecting fertilizer use upon participation.     

Commercial Real Estate Valuation, Development and Occupancy Under Leasing Uncertainty

A model of commercial property valuation is developed where individual property owners are price takers and tenants randomly arrive and depart. Spot lease and tenant reservation prices are stochastic and correlated and can divert from but eventually revert back to market equilibrium. Within this framework we examine built property values and vacancy rates for varying parameter sets representing differing markets and economic conditions. We also examine how potential and existing vacancies, spot lease prices and tenant reservation prices feed back into development decisions. We demonstrate how preleasing acts as a hedge to the developer against the risk of leasing uncertainty.     

Beyond the water cooler: using socialization to understand use and impact of networking services on collaboration in a business incubator

Scholars and policymakers claim that Business Incubators (BIs) add value by facilitating internal cooperation between tenant firms. Taking a tenant perspective, this research investigates the impact of a tenant's length of BI tenure on the use of formal internal networking services the BI management provides, and then on the tenant's level of intra-BI cooperation. The premise is that BI tenants use and benefit more from formal internal networking services when their socialization through participation in BI informal networking activities is low. When socialization is high they will enjoy a stronger direct effect of tenant tenure on cooperation with other tenants. Findings from data collected from a Dutch BI confirm the premise of our moderated-mediation model. Results also show that both mechanisms complement each other and that each contributes significantly to tenants' sales growth. It lends support to the effectiveness of BI formal internal networking services, but also stresses the importance of socialization through informal networking activities.     

The Economics of Architecture and Urban Design: Some Preliminary Findings

This paper makes a preliminary attempt to evaluate empirically the nature of the contribution of architectural quality to the value of buildings. An economic model is postulated that predicts equilibrium rent and vacancy behavior as a function of both design and non-design characteristics. Vacancies are created in equilibrium as a result of search and information costs and tenant heterogeneity and are observed by the landlord as price-inelastic demand behavior. Design quality is seen to influence both rent and vacancy behavior. Its effect, however, is dependent on characteristics both of the production and operating cost functions and of tenant demand for the design vs. non-design amenity. An important characteristic of the design amenity is that it is not, in general, independent of the production function for non-design amenities. The model is tested using disaggregate cross-sectional and longitudinal operating performance and amenity data from a set of 102 class A office buildings in Boston and Cambridge. Data on design quality for the set of buildings were provided by a detailed evaluation of each structure by a panel of architects. Results confirm a strong influence of design on rents; structures rated in the top 20% for design quality were predicted to extract almost 22% higher rents than those rated in the bottom 20%. In contrast, the data showed a weak relationship between vacancy behavior and design quality. Finally, good design was shown to cost more to produce on average, but not necessarily in every case. The magnitude of the point estimates of the rent, vacancy, and construction cost effects suggest that good design may not in fact be more profitable on average, but as with a lottery, may provide a small probability of a high return to the developer.     

Valuing Retail Shopping Center Lease Contracts

In this article we set up a real option model of retail shopping center leases. The model incorporates the effects of stochastic sales externalities and the possibility of tenant default, and in the presence of these effects, we derive and solve a partial differential equation that can be used to price a lease transaction. The model then sums across all tenants to determine the value of the shopping center. The model generates a number of new predictions, including why a Jorgensonian user cost of capital may overestimate shopping center values, why the general industry practice is to ignore percentage rent payments and tenant default risk in commercial mortgage underwriting and why shopping center owners may not act opportunistically as most observers seem to think they do.     

The Effect of Subsidized Housing on Values of Adjacent Housing

This is a case study of the effect of subsidized housing on the value of adjacent non-subsidized housing. Four townhouse clusters in Fairfax County, Virginia, were selected for study because of the high degree of homogeneity between clusters. The clusters are all in the same community but vary in distance from subsidized housing. Sale prices were analyzed using a regression model which included distance from subsidized housing as an independent variable. Based on the results of the regression analysis, the authors conclude that the subsidized housing had a negative impact on the values of adjacent properties.     

Tax Structure and Natural Vacancy Rates in the Commercial Real Estate Market

A number of studies have postulated that the Economic Recovery Tax Act of 1981 (ERTA 1981) was responsible for the dramatic overbuilding that occurred between 1981 and 1986, primarily because returns became less sensitive to "real" demand. While there has been much research on how equilibrium or "natural" vacancy rates in the real estate market are determined, beginning with Rosen and Smith's seminal paper in 1983, virtually none of this work has dealt with the impact of the tax environment. This study makes an initial attempt to answer this question with respect to equilibrium vacancies resulting from tenant (or owner) turnover. A formal model is developed that considers as an objective function the landlord's desire to maximize his/her after-tax equity returns in an environment of monopolistic competition in which individual projects face downward-sloping demand curves, owing to market conditions and a degree of heterogeneity among tenants in search costs or some other characteristic. The natural vacancy rate is shown not to depend directly upon the tax environment, but to depend indirectly upon it only to the extent that equilibrium market rents are lowered. The nature of the vacancy response depends critically upon the shape of the tenant demand response relationship upon its transition to a lower-rent region. This response is interactive with the degree of turnover and supply responsiveness within individual markets.     

Free revealing and the private-collective model for innovation incentives

A central tenant of open innovation is free revealing of the detailed workings of novel products and services, so that others may use them, learn from them, and perhaps improve them as well. We explain that innovators frequently do freely reveal proprietary information and knowledge regarding both information-based products and physical products they have developed. We explain why free revealing can make good economic sense for innovators and for society as well. The article develops the case for free revealing in terms of a 'private collective' model of innovation incentives.     

Pilferage from opaque food subsidy programs: Theory and evidence

Theft rates from subsidized food programs vary greatly and strongly influence program efficiency. Unfortunately, the determinants of these variations remain understudied because the agencies that run these programs seldom publicize the allocations of subsidized food to local markets. We develop a theoretical model of pilferage which predicts that: (i) pilferage from opaque programs is likely to rise more than proportionately with per capita food allocations; (ii) pilferage of inferior goods may be lower in poorer communities; (iii) pilferage rates need not rise as price subsidies are increased; and (iv) pilferage may rise as the relative quality of subsidized food is reduced. A comprehensive literature review and new estimates of pilferage across regions of the Philippines validates these predictions. Our finding, that around 48% of the subsidized rice went missing, is robust to new tests for sampling and recall error. Our policy discussion encourages geographic over administrative targeting, greater transparency in food allocations, and the use of realistic quotas.     

Developing and Using Forecasting Models of Consumer Durables The Case of Color Television

Predicting the future sales of new and established products is a critical activity for companies to be able to plan and control their operations. Forecasting consumer durable sales is an especially difficult and challenging task since the marketplace is always changing. Barry Bayus, Saman Hong and Russell Labe present the concept of a market-driven forecasting model and discuss an application involving the forecasting of color television industry sales for RCA's Consumer Electronics Division. An important aspect of this application is that a single approach or model was inadequate to accurately forecast sales over the entire period since the introduction of color TV. Econometric and simulation models which were developed are described, along with their forecasting performance and management acceptance and use.     

Sales recruiting—A major area of underinvestment

How does a firm decide whether the amount now being spent to generate sales force applicants is too much, not enough, or about right? This question can be answered by using information routinely generated by corporate activities and a relatively straight forward decision theory technique. To illustrate that technique, an analysis was conducted for a hypothetical but by no means atypical firm. The results suggest that many corporations could appreciably increase their overall profitability by spending more on sales force recruitment and selection.     

Response bias in the measurement of salesperson orientations: The role of impression management

Impression management has long been recognized as a form of response distortion in the self-reported attributes and attitudes of salespersons and job applicants. In this study we examine whether measures of salesperson orientations may be susceptible to this self-enhancing response bias. Salesperson orientations examined include customer and selling orientations, and sales learning and performance orientations. Characteristics of these response biases include extreme responses to job desirable items, low construct reliability, low predictive validity, and a factor structure in which job-desirable items form a common factor. The analysis of a survey of pharmaceutical salespersons suggests self-enhancing responding may be a problem in the measurement of salesperson orientations. We identify steps that firms and researchers can take to identify self-enhancing responses.     

An Investment Model of the Demand and Supply For Industrial Real Estate

A recent inventory of industrial building in fifty-two major metropolitan areas of the country indicates that most such space is either owner occupied or single tenant. This suggests that the production of industrial space may be modeled as a firm "investment" decision. Using the completion date of each inventoried building, we construct a time series of plant completions that moves similarly to some other national investment data. We are able to successfully estimate an "accelerator" type model of plant deliveries, driven by movements in employment and the after-tax cost of corporate capital. Our model can be used to estimate a measure of excess plant capacity in the market, and historic values of this measure do move parallel to some recent industrial vacancy data.     

Influence of Rent Differentials on the Choice between Office Rent Contracts with and without Relocation Provisions

In this paper we concern ourselves empirically with the influence of rent differentials on the choice between rent contracts with and without relocation provisions investigating the effects of relocation provisions on office rents. The study departs from the extant literature by using a switching simultaneous-equations model to estimate hedonic rent functions for alternative office lease contracts with choices of relocation provisions. The empirical results suggest that price considerations and certain lease terms are important determinants of the choice of office relocation rights. The results also suggest that certain tenant characteristics, like tenant size and creditworthiness, have only a marginal effect on the choice of relocation rights.     

The certification effect of R&D subsidies from the central and local governments: evidence from China

This paper explores whether the certification effect of R&D subsidies exists in China, a typical transition economy, and how subsidies from different sources present distinct signals to external investors. Using the sample of Chinese listed companies and a multivariate regression model, our results suggest that R&D subsidies from the central government send a negative signal about the quality of R&D projects and worsen the access of subsidized firms to external capital. In contrast, subsidies from local governments serve as a positive signal and the access is eased. We contribute to the studies of the certification effect by taking the distinct incentives of different government agencies in China into account and by investigating the relevance of such incentives to the diverse types of signal. The implications of our findings and related directions for future research are further discussed.     

Can agricultural input subsidies reduce the gender gap in modern maize adoption? Evidence from Malawi

Nationally representative data for Malawi were used to measure the gender gap in adoption of modern maize and to investigate how, if at all, Malawi’s Farm Input Subsidy Program (FISP) has impacted the gap. Regression results show the probability of adopting modern maize was 12% lower for wives in male-headed households, and 11% lower for female household heads, than for male farmers. Receipt of subsidized input coupons had no discernible effect on modern maize adoption for male farmers. Receiving a subsidy for both seed and fertilizer increased the probability of modern maize cultivation by 222% for female household heads, suggesting the FISP has likely reduced the gender gap in adoption of modern maize in Malawi.     

Percentage Rent in Retail Leasing: The Alignment of Landlord–Tenant Interests

Only retail tenants pay their landlord a percentage of revenue in addition to the traditional fixed rent. The latter has often been shown to vary widely across stores–inverse to the sales externalities generated by the store. This paper demonstrates that revenue percentages vary widely as well, and positively with fixed rent (sales externalities). It is then argued that existing theoretical explanations for percentage rent (involving generic risk sharing and tenant effort issues) are not specific to the retail sector and apply to all tenant–landlord relationships. Instead, a model is proposed where percentage rent gives the correct incentive to landlords–rather than to tenants. In this model, percentage rent ensures that with sales externalities, landlords do not act opportunistically and always have the interest of existing tenants in mind when expanding, altering or reletting space in a shopping center.