Cancellation Strategies in Commercial Real Estate Leasing

In a contractionary corporate environment, lease cancellation strategy becomes an important component of corporate real estate leasing decisions. This paper presents a leasing model in which less well-informed lessors offer leases with alternative lease cancellation options. The model demonstrates that a tenant's choice of cancellation option reveals his private information with respect to the likelihood of option exercise. Tenants who select a lease with a downsizing option are more likely to exercise the option. Given the higher likelihood of option exercise, the model suggests that the downsizing option will be priced higher. We examine a sample of 311 leases, and consistent with the model's prediction, we find that on average leases with a downsizing option have significantly higher contract rent. However, termination and sublet options are not associated with higher rent. The evidence suggests that market uncertainty, private information and adverse selection affect the pricing of alternative cancellation options and the choice of cancellation option.     

Commercial Real Estate Leasing, Asymmetric Information, and Monopolistic Competition

We model the choice of lease type, gross lease versus net lease, in an environment in which lessees have private information with respect to their expected intensity of utilization of the leased space, and in which lessors have market power with respect to the pricing of the lease. Unless the lessor can provide operating services at lower cost than the lessee, there exists a lemons problem. We examine a market in which lessors can provide operating services at lower cost. Given asymmetric information with respect to expected lessee utilization and/or damage to the leased space, the lessor offers both a gross and net lease, where the higher expected utilization lessees select the gross lease and the lower expected utilization lessees select a net lease. Lease pricing depends on both the lessor's beliefs with respect to lessee utilization of the space and the lessor's market power. In a monopolistic market, relative to a competitive market, a lessor charges higher rent for a gross lease relative to a net lease in order to extract a portion of the gain from shifting operating services to the lessor. Given the higher rent for a gross lease, a smaller proportion of lessees (only very high utilization lessees) selects a gross lease in a monopolistic market. Therefore, the expected cost savings associated with shifting operating services/provision of maintenance to the lessor are smallest in a monopolistic market.     

Demand Uncertainty,Development Timing and Leasehold Land Valuation: Empirical Testing of Real Options in Residential Real Estate Development

This article develops and tests a long‐dated American call option pricing model for valuing development land under leasehold. We analyze and test option values in ten detailed Hong Kong cases involving purchase, holding, converting and developing land. We also test for optimal exercise of long‐dated American calls using processes based on the optimal trigger ratio feature of the perpetual American call option model. Generally, the empirical results confirm presence of a positive and nontrivial option premium (mean +5.274%) in the cases, and that developers appear to delay exercise to the point predicted by the real options model.     

Equilibrium of Housing and Real Estate Brokerage Markets Under Uncertainty

The purpose of this paper is to develop a model of the real estate brokerage and housing markets with imperfect information. The paper considers general equilibrium in these markets with and without a multiple listing service. Input prices are found to affect the equilibrium housing price, brokerage commission, and split factor. The introduction of a multiple listing service is found to have several important effects. The MLS causes housing value to increase, but its effect on the commission rate is indeterminate. Contrary to the results of another paper, MLS brokers, on average, will likely undertake more search for both buyers and listings than will a non-MLS broker. The primary reasons are related to the greater efficiency of search in the MLS context.     

Commercial Real Estate Returns

In the commercial real estate market, which is perceived to be relatively inefficient, investors have comparative advantages; hence there are significant costs to diversification. This paper presents for the first time a series of market (or quasi-market) returns for a large data base. This data base is believed to be the most complete commercial real estate data base yet constructed. The paper empirically evaluates the benefits of diversification along various dimensions within the commercial real estate opportunity set. The analysis confirms certain aspects of prior work concerning inflation protection and diversification opportunities while concluding that even investment grade real estate investments are heterogeneous assets.     

Real Estate Valuation Under Rent Control: The Case of Santa Monica

This is a study on the impact of rent control in the city of Santa Monica on rents and apartment house values. Findings include that rent control has significantly lowered rents for tenants, lowered the real values of apartment buildings and that the gross rent multipliers of buildings sold subsequent to the passage of rent control failed to decline. This last finding is a result of, according to the author, optimism on the part of buyers that the controls will be modified or eliminated in the future.     

Capital Asset Pricing and Real Estate Valuation*

This paper examines the Capital Asset Pricing Model with respect to its implications for real estate investment analysis and appraisal. The derivation of the CAPM, and theoretical problems with it, are discussed, along with its empirical validation. The similarities and differences between real estate and securities markets are evaluated. Alternative models to the CAPM are presented, followed by the conclusions.     

Corporate Real Estate Ownership and Productivity Uncertainty

This article empirically tests the relationship between corporate real estate (CRE) holdings and productivity risks of firms. Using a large sample of public listed U.S. firms for the period from 1984 to 2011, we show that CRE ownership is significantly and negatively correlated with productivity risks of firms. Firms with high‐productivity risk own less CRE assets. When testing dynamic changes to CRE holdings, we estimate a significant and positive elasticity of CRE investments of 5.2% in response to cash flow shocks. If the adjustment cost is high, high‐risk firms are expected to hold less CRE assets, so that they could reduce potential losses associated with CRE holdings when negative productive shocks occur.     

Parking Externalities in Commercial Real Estate

Local governments have employed a variety of strategies to reduce street congestion through an increase in parking supply. These policies have been criticized as an implicit subsidy that shifts costs from drivers to the public at large. Others have noted that parking lots and structures can lead to increased water and air pollution. However, there has not been an examination of whether parking, presumably by reducing congestion, generates external benefits. We measure whether nearby parking availability influences commercial property prices after controlling for property characteristics, including on‐site parking. We find that publicly accessible parking, such as commercial parking garages, generates significant aggregate externalities. We also find evidence of a significant complementary relationship between building and parking area in property values. This suggests that parking regulation could have a significant impact on property development through its effect on the value of the marginal square foot of building area.     

Portfolio Considerations in the Valuation of Real Estate

When a real asset rises in price faster than inflation (as real estate did in the late 1970s) and rises significantly in price over an extended period (as real estate has done for the last decade and one-half), it concerns valuation and investment professionals who fear about it being over-valued. One of the reasons for such price performance may be an increase in demand due to the portfolio characteristics of the asset during the period of time in question. For real estate this means the proportion included in optimal portfolios should be significant and increasing as individual tax rates increase in an environment of increasing average tax rates.
This study uses six tax brackets (0%, 10%, 20%, 30%, 40%, 50%) and portfolios consisting of three traditional assets (NYSE common stocks, corporate bonds and small stocks) plus three types of real estate (residential, business and farmland) to demonstrate that this is what has transpired in the real estate markets. Optimal portfolio weights are derived for each asset for after-tax portfolios. Real estate in general and residential real estate especially increased as a proportion of the optimal after-tax portfolio as individual tax rates increased. Other studies are used to demonstrate an environment of increasing average tax rates.     

Real Estate Valuation Models: Lender and Equity Investor Criteria

The use of valuation models that focus on lender criteria has been growing in the appraisal field. In the rush to build lender criteria into real estate valuation models, equity investor criteria, expectations, and requirements occasionally have been ignored. The specific criteria considered in this paper are the loan-to-value ratio and the debt coverage ratio for lenders and the equity dividend rate for equity investors. Each of these three criteria may be a binding constraint on value.
Graphical analysis provides a framework within which major real estate valuation models (i.e., Ellwood, McLaughlin, Gettel, Lusht-Zerbst, and Steele) are compared. A new valuation model (i.e., the Cannaday-Colwell model) is developed which utilizes the equity dividend rate.
The three definitional models (i.e., McLaughlin, Gettel, and Steele) are found to be relevant only by mere coincidence. Each of these models simultaneously considers two of the three key criteria, completely eliminating the possibility of consideration of anything else; i.e., the models become tautological.
It is shown that the discounted cash flow based models (i.e., Ellwood, Lusht-Zerbst, and Cannaday-Colwell) each tell one-third of the story. One of these models will be relevant depending upon whether the binding constraint is the maximum loan-to-value ratio, the minimum debt coverage ratio, or the minimum equity dividend rate. The relevant model is the one that yields the lowest value estimate of the three.     

A New Measure of Real Estate Uncertainty Shocks

The objective of this article is twofold: first, we construct a new uncertainty measure that is specific to the real estate sector; second, we compare our uncertainty measure to other well‐established measures in the literature, such as the Macro Uncertainty (MU) by Jurado, Ludvigson and Ng. We show that our Real Estate Uncertainty (REU) measure accounts for twice as much of variation in housing prices—and starts compared to the MU. Furthermore, vector autoregressions and Granger‐causality analysis show that our uncertainty measure affects housing starts—and prices—in contrast to the other uncertainty measures that affect only housing starts.     

A Different Look at Commercial Real Estate Returns

Commercial real estate makes up a relatively small percentage of most institutional portfolios, even though the existing literature has consistently reported attractive risk-return characteristics that would suggest much larger allocations. This discrepancy has been explained by a perceived lack of comparability between return series calculated for real estate and those calculated for other asset classes. Just as investors actively involved in the futures markets do not consider individual common stocks to be traded continuously, those active in the stock market do not consider real estate to be traded continuously. In both cases, adjustments to reported returns are necessary to achieve a degree of comparability. This study makes such adjustments, using sales data from properties that help comprise the National Council of Real Estate Investment Fiduciaries / Frank Russell Company (NCREIF/FRC) Index to generate a "transaction-driven" commercial real estate return series. Examination of the risk-return characteristics of this series shows that it is quite different from traditionally reported real estate return series and far more consistent with risk-return characteristics that have been reported for other asset classes.     

The Walkability Premium in Commercial Real Estate Investments

This article examines the effects of walkability on property values and investment returns. Walkability is the degree to which an area within walking distance of a property encourages walking for recreational or functional purposes. We use data from the National Council of Real Estate Investment Fiduciaries and Walk Score to examine the effects of walkability on the market value and investment returns of more than 4,200 office, apartment, retail and industrial properties from 2001 to 2008 in the United States. We found that, all else being equal, the benefits of greater walkability were capitalized into higher office, retail and apartment values. We found no effect on industrial properties. On a 100‐point scale, a 10‐point increase in walkability increased values by 1–9%, depending on property type. We also found that walkability was associated with lower cap rates and higher incomes, suggesting it has been favored in both the capital asset and building space markets. Walkability had no significant effect on historical total investment returns. All walkable property types have the potential to generate returns as good as or better than less walkable properties, as long as they are priced correctly. Developers should be willing to develop more walkable properties as long as any additional cost for more walkable locations and related development expenses do not exhaust the walkability premium.     

商业地产投资的实物期权特性及应用框架研究

商业地产开发投资中存在投资的不可逆性、外部环境的不确定性和决策的灵活性,因而具有实物期权特性。从确定要解决的问题、分析不确定性的来源、鉴别关键的不确定性因素、识别实物期权类型、构建期权定价模型、计算项目价值、检查计算结果和重新设计8个方面,构建了商业地产投资决策的实物期权分析框架。     

商业银行房地产项目放贷初始决策研究

信贷业务是商业银行利润的主要来源,也是银行管理和决策中最复杂、最困难的金融业务之一,具备一个良好贷款资产结构和拥有大量较强盈利能力贷款资产是商业银行核心竞争力的重要体现之一.文章从银行视角出发,对房地产项目的放贷问题进行投资分析,由于该决策具有刚性,故传统投资分析方法足够对其评价;对某房地产新项目实例进行计算分析,采用以资本资产定价模型为基础的适用新模型确定折现率,取得了较好的效果,具有一定的现实应用意义.     

100 Years of Commercial Real Estate Prices in Manhattan

This article is able to put together a database of 86 repeat-sales transactions for office properties in lower and midtown Manhattan spanning the years from 1899 to 1999. Using this very limited database, decade-interval changes in real property prices are estimated—with varying degrees of precision. Our conclusions are two fold. First, adjusting for inflation, commercial office property values were 30% lower in 1999 than they were in 1899. Second, within any decade values often rise and fall by 20–50% in real terms. With these results, the long-term historic return to New York commercial property must mostly comprise yield with capital gains limited to general inflation. Other historical studies consistent with this conclusion are reviewed.     

Credit Restrictions and the Market for Commercial Real Estate Loans

This paper develops a model of the market for commercial real estate loans based on the variables used by investors and lenders in property decision-making: the income capitalization (cap) rate, the debt-coverage ratio and the loan-to-value ratio. Empirical results for aggregate United States real estate originations and commitments for 1970–93 indicate that loan demand is sensitive to the cap rate and to building permit issuance. The dominant criterion used by lenders is the debt-coverage ratio as opposed to the loan-to-value ratio, a finding which may have implications for underwriting standards and credit policy.