“Sustainability disclosure and financial performance: The case of private and public real estate”
Avis Devine, Nils Kok, Chongyu Wang
First published: August 2023 | Journal of Portfolio Management | https://doi.org/10.3905/jpm.2023.1.534
The built environment carries an outsized environmental footprint, and aspects such as energy consumption impact the bottom line of commercial real estate (CRE) investors. A large portion of CRE assets are owned and operated by both private equity real estate (PERE) funds and listed property companies (REITs). Therefore, the extent to which these public and private entities integrate sustainability considerations into their investment and operating decisions may impact both the environmental and financial performance for the organizations as well as the environmental performance of the broader market. We provide a comprehensive analysis comparing the sustainability performance of REIT and PERE firms/funds, as well as an analysis of the relationship between sustainability and the financial performance of REITs. Results indicate that private and public CRE entities now seem on par in their integration of sustainability into firm/fund management and policies. However, the performance aspect of sustainability is stronger for REITs. Examination of REIT financial performance indicates that higher levels of sustainability disclosure are associated with enhanced operating performance and firm valuation, as well as a higher propensity for holding environmentally certified buildings.
“The role of tenant characteristics in retail cap rate variation”
Mariya Letdin, Stacy Sirmans, Greg Smersh, Tingyu Zhou
First published: July 2023 | Journal of Real Estate Finance and Economics | https://doi.org/10.1007/s11146-023-09958-9
This study examines the pricing of tenant credit risk utilizing variation in cap rates for single-tenant net lease (STNL) properties. Despite an abundant literature on micro- and macroeconomic factors that influence capitalization rates there is virtually no existing literature to evaluate investment risk pricing for individual tenants. Using a unique dataset of more than 8,200 single-tenant retail property transactions from 2001 to 2019 in the United States, we quantify the asset pricing implications of risk associated with tenant credit characteristics. Our results show that these tenant characteristics play an important role in explaining cap rate variations, and that investors are especially sensitive to expected income risk. Pricing implications of expected tenant income uncertainty, tenant income growth and asset location quality are also explored.
“Competition, agglomeration, and tenant composition in shopping malls”
David Leung, Peng Liu, Tingyu Zhou
First published: May 2023 | Real Estate Economics | https://doi.org/10.1111/1540-6229.12442
Previous models of tenant composition in shopping malls have focused on traditional anchor and nonanchor retailers who sell similar merchandise. With the changing preferences of modern shoppers who seek unique and entertaining experiences, this article introduces a new type of store known as “specialty stores” that offer experiential consumption. Using a dynamic game model that considers the trade-off between the benefits of agglomeration and the costs of competition, we re-examine the tenant optimization problem faced by mall owners in the current retail environment. Our findings show that specialty stores have a significant impact on the optimal tenant mix and the rent revenue of developers. This article provides valuable insights into the optimal tenant composition for large-scale shopping centers that cater to contemporary consumers.
“How do institutional investors react to local shocks during a crisis? A test using the COVID-19 pandemic”
David Ling, Chongyu Wang, Tingyu Zhou
First published: May 2023 | Real Estate Economics | https://doi.org/10.1111/1540-6229.12439
We examine how institutional investors reacted to geographically dispersed local shocks during the early stages of the COVID-19 pandemic. A sample of real estate investment trusts (REITs) enables us to link two layers of geography: the locations of the assets in which the REITs were invested and the headquarters locations of institutional investors who owned REIT shares. We find that the institutional ownership of firms with an economic interest in the investors’ home markets declined more if those markets were heavily affected by the pandemic. In addition, the ownership responses to the COVID-19 shock were larger in those markets in which REITs had larger portfolio allocations and in markets that were home to the investors. Importantly, we find that nonpassive and short-term investors may have overreacted to the local shocks because their REIT portfolios subsequently underperformed relative to passive and long-term investors. Our study highlights the importance of geography in the formation of investors’ expectations during market crises.
“Introduction to special issue: Topics related to real estate market efficiency”
Daniel Broxterman, Dean Gatzlaff, Mariya Letdin, Stacy Sirmans, Tingyu Zhou
First published: December 2022 | Journal of Real Estate Finance and Economics | https://doi.org/10.1007/s11146-022-09928-7
The efficiency of the real estate market is a major concern for homeowners, investors, lenders, policymakers, and researchers. Modern academic literature has mostly moved beyond an early emphasis on formal tests of informational efficiency. The Grossman and Stiglitz (1980) paradox holds that perfect informational efficiency is impossible and the joint hypothesis problem implies that market efficiency is not even testable. Instead, researchers now commonly examine the speed, accuracy, and persistence of price movements in response to new information, as the allocative efficiency of a market ultimately depends on its degree of informational (and operational) efficiency. This special issue is devoted to exploring these issues.
"Conflicts of interest and agent heterogeneity in buyer brokerage"
Lawrence Kryzanowki, Yangting Wu, Tingyu Zhou
First published: November 2022 | Real Estate Economics |
This article investigates the incentives of agents working with buyers (buying agents) under the fixed percentage commission system and the implications on housing market outcomes. Our model shows that the absence of a binding contract creates a risk of losing clients for buying agents, which helps mitigate the conflict of interest between buying agents and their clients. Both the buying agent's prediction accuracy regarding their client's reservation prices and the level of tolerance given by the buyer to the buying agent affect the binding force. Results from simulations and empirical analyses using house transactions in Canada support our model predictions.
"Predicting accounting misconduct: The role of firm-level investor optimism"
Shantaram Hegde, Tingyu Zhou
First published: November 2022 | Business and the Ethical Implications of Technology, edited by Kristen Martin, Katie Shilton, Jeffery Smith |
Motivated by a large literature on how firm-specific resources (such as leadership and management skills, strategies, organizational capabilities and intellectual properties) drive firm performance, we propose and find that heterogeneity in investor optimism regarding firm-specific attributes plays a very important role in influencing the managerial propensity to manipulate financial statements. When firm-level investor optimism is moderate, the incidence of accounting misconduct increases, but it decreases when investors are highly optimistic. Further, market reaction to the announcement of financial restatements is more negative when investors held more optimistic firm-specific beliefs at the time of initial misstatement. These findings are robust to alternative firm-specific optimism measures linked to analysts, general investors and unsophisticated individual investors, controls for market-wide consumer sentiment unexplained by macroeconomic factors, economy-wide and industry level optimism, potential selection bias and reverse causality. Our analysis highlights the importance of firm-level investor optimism in predicting, preventing and detecting accounting misconduct.
"Face-to-face interactions, tenant resilience, and commercial real estate performance"
Chongyu Wang, Tingyu Zhou
First published: October 2022 | Real Estate Economics
We study the impact of face-to-face (FTF) interactions on commercial real estate (CRE) performance. By linking tenants, properties, and CRE firms, we construct three novel FTF measures that capture tenant remote working, internal communication between coworkers, and external contact with customers. Using the COVID-19 pandemic as an exogenous shock to the FTF economy, we find that firms holding properties with tenants that are more resilient to social distancing perform better. These FTF effects weaken over the long term, however. As investors are capable of compiling valuable information at granular levels regarding how tenants operate, our findings support market efficiency and shed light on postpandemic CRE performance.
“Spread too thin: REIT asset dispersion and divergence of opinion”
Mariya Letdin, Stace Sirmans, Stacy Sirmans
First published: September 2022 | Journal of Real Estate Finance and Economics | https://doi.org/10.1007/s11146-022-09920-1
In this paper we explore the drivers and implications of divergence in investor opinion of firm value. We use dispersion in analyst estimates of Net Asset Value in REITs as a measure of divergence. We find that divergence in opinion of value is positively associated with portfolio geographic diversity, the presence of international buildings, and firm leverage. Portfolio concentration in tertiary versus gateway markets has no effect on dispersion of value estimates. We find that greater divergence in analyst opinion of value predicts lower stock returns and higher return volatility. Consistent with theoretical predictions from Miller (1977), we find that firms for which investors have the highest disagreement on valuation, pessimistic views of investors are not fully incorporated into prices, resulting in lower future returns.
"Information frictions in real estate markets: Recent evidence and issues"
Daniel Broxterman, Tingyu Zhou
First published: August 2022 | Journal of Real Estate Finance and Economics | https://doi.org/10.1007/s11146-022-09918-9
This article reviews research on the economics of information in real estate. It covers equity investment in private and public markets and intermediation by brokers. The review shows how, by examining the nature and extent of information frictions in these important markets, research has improved our understanding of potential market failures and corrections which can improve market functioning.
"Mortgage relief: Who CARES?"
Mariya Letdin, Meagan McCollum
First published: June 2022 | Journal of Real Estate Research | https://doi.org/10.1080/10527001.2022.2079170
We analyze the effects of being ineligible for mortgage payment relief by examining the aftermath of the Home Affordable Refinance Program (HARP). Using a comparable sample of borrowers with publicly (Freddie Mac) and privately (Bbx) securitized loans we compare loan performance and quantify potential wealth, consumption, and credit consequences for prime borrowers whose loans were placed in private securitization pools and who were thus ineligible for a government relief program. We show that restricting program benefits to include only borrowers in federally backed mortgage pools results in significant loss in wealth (through reduced prepayment and increased default) for those otherwise similar borrowers whose loans are placed outside of GSE pools. The greatest detriment is documented in CBSAs with the largest housing price declines. The results shed light on the potential consequences of an identical provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which provides mortgage forbearance relief to qualifying borrowers, whose loans are placed in a government backed mortgage pool.
"Asset productivity, local information diffusion, and commercial real estate returns"
David Ling, Chongyu Wang, Tingyu Zhou
First published: May 2021 | Real Estate Economics | https://doi.org/10.1111/1540-6229.12354
An extensive literature finds that indices of returns on equity real estate investment trusts (REITs) predict return indices in the private commercial real estate (CRE) market. Using a novel geographically weighted proxy for the quarterly performance of the property types within the local markets in which an REIT is invested, or property portfolio return (PPR), we find a "private predicts public" result in a cross-sectional, firm-level context. This finding suggests that geographically dispersed information and investors limited attention can delay timely stock price adjustments. Our findings also suggest that it is the diffusion of information about "local" price changes, rather than local supply elasticities, regulatory constraints, the degree of local information risk, current rental income, or local liquidity that predicts REIT returns. The PPRs associated with REIT allocations to major "gateway" markets are more predictive of REIT returns than the PPRs produced by allocations to secondary and tertiary markets. This study improves our understanding of the speed at which "local" information about the perceived productivity of a firm's assets is capitalized into stock prices.
"Examining omitted variable bias in anchoring premium estimates: Evidence based on assessed value"
Tingyu Zhou, John Clapp, Ran Lu-Andrews | Abstract
First published: March 2021 | Real Estate Economics | https://doi.org/10.1111/1540-6229.12348
A new assessed value approach is proposed to control for the amount of persistent unobserved quality. The approach to a well-established two-stage framework developed by Genesove and Mayer (GM, 2001) is applied, who test the effect of an expected loss on final transaction prices in the housing market. It is shown that the assessed value model effectively mitigates the omitted variable bias and produces similar results as GM when the first-stage residual is included. Importantly, the model does not rely on repeat sales and therefore provides a powerful new tool for estimating market value. Results are robust to alternative specifications, to controlling for loan-to-value ratios, to replacing final sale price with listing price, to alternative fixed effects, to subperiods, to different holding periods, to simulated quality, to excluding flippers, and to controlling improvements between sales.
"Does restricting the entry of formula businesses help mom-and-pop stores? The case of American towns with unique community character"
Minjee Kim, Tingyu Zhou
First published: March 2021 | Economic Development Quarterly | https://doi.org/10.1177%2F08912424211002913
Communities worldwide are increasingly introducing regulatory measures to protect independent businesses from chain stores, but the efficacy of these attempts is largely debated. Moreover, effects are likely to vary by the characteristics of the local economy, a consideration overlooked by existing studies. Using a sample of U.S. cities with unique community characteristics, the authors examine Formula Business Restrictions (FBR), a type of an American land use regulation that restricts the entry of "formula businesses." The authors find that the passage of FBR led to a higher number and percentage of employees working in mom-and-pop businesses, which was primarily achieved by protecting existing ones from downsizing. This positive effect occurred over time with increasing magnitude. The authors also find heterogeneous effects on different sectors: FBR had strong positive effects on the retail sector, but not on the service sector. Findings suggest that chain store entry barriers can be beneficial for mom-and-pop businesses when designed carefully.
"Is the behavior of sellers with expected gains and losses relevant to cycles in house prices?"
Tingyu Zhou, John Clapp, Ran Lu-Andrews
First published: February 2021 | Journal of Housing Economics | https://doi.org/10.1016/j.jhe.2021.101750
We examine anchoring to the price paid at purchase during an important cycle in Connecticut, 2000–2017 which is similar to cycles in many other states. Our repeat sales model, which mitigates endogeneity and unobserved heterogeneity, provides robust estimates of negotiated price premiums (discounts) of sellers with expected losses (expected gains). Our model bridges from individual to aggregate price responses, and it supports new stylized facts about housing market cycles. Results suggest that anchoring was associated with reductions in observed changes in house prices during the boom (2004–2006) as sellers with gains dominate with their price discounts, and with reduced price declines during the bust (2007–2012) when the behavior of those with losses becomes important. Additional results making minimal model assumptions suggest that loss behavior is statistically significant and important at turning points, i.e., during the transition from a boom to a bust and vice versa. Double mean differences suggest that those with losses used the mild recovery as an opportunity to realize losses at reduced premiums after long delays.
"Betting against the sentiment in REIT NAV premiums"
Mariya Letdin, Stace Sirmans, Stacy Sirmans
First published: January 2021 | Journal of Real Estate Finance and Economics | https://doi.org/10.1007/s11146-020-09803-3
We dissect REIT NAV premiums and examine their relation to expected returns. More than half of the cross-sectional variation in NAV premiums can be explained by readily observable company characteristics, such as size, property type, location, leverage, and profitability. We empirically decompose NAV premiums into characteristics-driven (fitted) and sentiment-driven (orthogonalized) components. The transient, sentiment-driven component of NAV premiums is strongly negatively related to future returns, whereas the stable, characteristics-driven component is a very weak positive predictor of returns. A long-short investment strategy that purchases (sells short) REITs with the lowest (highest) sentiment- driven NAV premiums generates 9% per year, which is 3% per year more than a strategy based on the raw NAV premium. These results shed light on the role of investor sentiment in REIT pricing and have important implications for REIT active investment management.
"House prices, government quality, and voting behavior"
Daniel Broxterman, Trenton Chen Jin
First published: January 2021 | Journal of Real Estate Finance and Economics | https://doi.org/10.1007/s11146-020-09796-z
The hypothesis that minority voters act in their economic self-interest in supporting municipal candidates of their own race or ethnicity has been tested using changes in municipal spending and employment. However, governments affect voter welfare in many other ways, particularly in the provision of quality public services. This paper exploits a natural experiment arising in 1995 when Congress created an appointed financial control board for the District of Columbia and gave to it many of the powers previously reserved to the local elected government. The natural experiment sets up a triple-difference research design based on changes in property values across District neighborhoods and voting behavior compared to untreated adjacent areas across the District boundary in Maryland. We find that oversight by the control board raised annual appreciation rates in the District by 178 to 254 basis points during the period from 1995 to 2001. Furthermore, effects of the intervention were uniformly positive across areas of the District that varied dramatically in their support for the incumbent administration that lost its powers. This implies, after the fact, that the administrations supporters had not voted in accord with economic self-interest.
"Pricing moral hazard in residential properties: The impact of sinkhole claims on house prices"
Randy Dumm, Charles Nyce, Stacy Sirmans, Greg Smersh
First published: November 2020 | Journal of Real Estate Finance and Economics | https://doi.org/10.1007/s11146-020-09804-2
Previous research shows that sinkhole presence, proximity, and density create negative externalities and all have a significant negative effect on house prices. This study extends sinkhole research by examining opportunistic fraud and moral hazard associated with the relationship between sinkhole insurance claims and house prices. This is done by evaluating the relationship between house prices and the payment or denial of sinkhole insurance claims for both affected properties and neighboring properties. Applying a spatial error regression model to single-family detached home sales and sinkhole insurance claims data for Hillsborough County, Florida for the period 2008 to 2016, we find that not only do sinkhole insurance claims have a negative impact on the property associated with the claim, but also have a negative impact on surrounding properties regardless of the source of classification. This result holds for both paid and unpaid insurance claims. The results also show a price discount even after the sinkhole has been remediated.
"The cost of debt for REITs: The mortgage puzzle"
Linda Allen, Mariya Letdtin
First published: October 2020 | Journal of Real Estate Research | https://doi.org/10.1080/08965803.2020.1822130
Established, low-leverage equity REITs with access to the public debt market rely on both non-recourse mortgages and full recourse bonds/notes as sources of long-term debt. Interest rates on secured, non-recourse debt (mortgages) include a costly strategic default option premium and do not benefit from a firms overall financial capacity. We find that use of non-recourse, mortgage debt is more likely for longer-term, smaller borrowings, and during recessionary periods, consistent with REITs valuing financial flexibility in their capital structure. The higher rates for property-level debt suggest a benefit to REITs versus single asset investors in terms of cost of capital. Since REITs also access debt at the corporate level, the spread between long-term non-recourse debt and long-term recourse debt implies a benefit to the REIT structure.
"Human capital divergence and the size distribution of cities: Is Gibrat's law obsolete?"
Daniel Broxterman, Anthony Yezer
First published: September 2020 | Urban Studies | https://doi.org/10.1177/0042098020953095
This article studies how the changing geographic distribution of skilled workers in the US affects theoretical models that use Gibrats law to explain the size distribution of cities. In the empirical literature, a divergence hypothesis holds that college share increases faster in cities where college share is larger, and a growth hypothesis maintains that the rate of city population growth is also directly related to initial college share. Examining the divergence hypothesis, the classic test for Gibrats law is shown to be a test for β-convergence. Testing shows that there has been absolute, not relative, divergence in human capital since the 1970s. However, the combination of even absolute divergence and the growth hypothesis is shown to violate the condition that a citys population growth is independent of its size. Additional testing finds that the relation between college share and city growth is concave rather than monotonic. These results imply that stochastic growth models can survive the challenge posed by divergence in the distribution of human capital.
"A first look at the impact of COVID-19 on commercial real estate prices: Asset-level evidence"
David Ling, Chongyu Wang, Tingyu Zhou
First published: September 2020 | Review of Asset Pricing Studies | https://doi.org/10.1093/rapstu/raaa014
This is the first paper to examine how the COVID-19 shock transmitted from the asset markets to capital markets. Using a novel measure of the exposure of commercial real estate (CRE) portfolios to the increase in the number of COVID-19 cases (GeoCOVID), we find a one-standard-deviation increase in GeoCOVID on day t-1 is associated with a 0.24 to 0.93 percentage points decrease in abnormal returns over 1- to 3-day windows. There is substantial variation across property types. Local and state policy interventions helped to moderate the negative return impact of GeoCOVID. However, there is little evidence that reopenings affected the performance of CRE markets.
"Trade-offs between asset location and proximity to home: Evidence from REIT property sell-offs"
Chongyu Wang, Tingyu Zhou
First published: June 2020 | Journal of Real Estate Finance and Economics | https://doi.org/10.1007/s11146-020-09770-9
We examine property sell-offs by real estate investment trusts (REITs) and find that investors respond favorably to sales of properties located close to a sell-off firms headquarters. The negative relationship between the distance from headquarters and cumulative abnormal returns (CARs) that we document exists only in non-gateway markets, though; there is no such relationship in gateway markets. This finding suggests that the positive effects of selling assets in small markets with high perceived risk and limited growth opportunities dominates the negative effects of the efficiency loss brought about by holding assets far away from home. This is the first study to simultaneously examine the proximity of a firms underlying assets to its headquarters and the location of individual assets in the context of asset sales. Our results are robust to several measures of proximity (using geographic distance, in miles, between a firms headquarters and its underlying assets or a nearby dummy for below-median distance), to alternative market classifications, to the inclusion of various fixed effects and controls for geographic concentrations (the Herfindahl index of how close to one another the properties are located) and property performance, and to bargaining power and business cycles.
"Economics of philanthropy--evidence from health crowdfunding"
Juliane Proeles, Denis Schweizer, Tingyu Zhou
First published: April 2020 | Small Business Economics | https://doi.org/10.1007/s11187-020-00336-w
This paper is the first comprehensive empirical study on the economics of health crowdfunding (HCF) campaigns. We develop a new theoretical framework that focuses on the channels Donor-Patient-Psychology and Donor-Donor-Psychology to examine campaign funding speed. Our data highlight that, on average, campaign funding goals are achieved more rapidly if the patient is an infant girl, and if campaign descriptions are more comprehensive but less technical (easier to read). Furthermore, campaigns begun around holidays are funded more quickly, with the highest funding speed found for Christian holidays. We posit that this indicates a "warm-glow" effect. Examining donations controlling for campaign fixed effects, we document strong and economically significantly negative donor-to-donor peer effects, where contributions by donors with public profiles may be crowded out by the previous contributions of their peers.
"Measuring human capital divergence in a growing economy"
Daniel Broxterman, Anthony Yezer
First published: April 2020 | Journal of Urban Economics | https://doi.org/10.1016/j.jue.2020.103255
The stylized fact that the fraction of workers who are college graduates appears to increase more in US cities where the initial share is larger has attracted significant attention. Furthermore, more educated cities appear to grow faster. These two trends could portend the divergence of cities by skill, with low-skill workers segregated in slow-growing or declining cities. This paper compares measures of skill divergence and finds that relative measures, which have the property of scale invariance, show no divergence for the period from 1970 to 2010. In addition, the relation between skill intensity and city growth appears to be concave, so that differences in the growth rate of skill intensity across cities may diminish over time as the average college share of the country rises.
"Institutional common ownership and firm value: Evidence from real estate investment trusts"
David Ling, Chongyu Wang, Tingyu Zhou
First published: March 2020 | Real Estate Economics | https://doi.org/10.1111/1540-6229.12312
This paper contributes to the ongoing debate about whether and how institutional common ownership (ICO) affects firm behavior. Using a sample of equity real estate investment trusts (REITs), which provide significant advantages for isolating a monitoring channel, we find a robust and positive relation between ICO and REIT firm value. The positive relation between ICO and firm value is driven mainly by motivated investors and becomes stronger when we construct our ICO measures using blockholdings. Our difference-in-differences analysis, using mergers between institutional investors, suggests a causal relation exists between ICO and firm value. After investigating various channels through which ICO could affect firm behavior, we conclude that asset allocation decisions and performance are the most plausible explanations. Our finding that the monitoring associated with ICO aids managers in their portfolio disposition strategies further supports this conclusion. This enhanced monitoring leads to increased property portfolio returns, as well as more geographic diversification.
"An empirical examination of shift-share instruments"
Daniel Broxterman, William Larson
First published: January 2020 | Journal of Regional Science | https://doi.org/10.1111/jors.12481
Bartik's (1991, 1993) approach to identifying shocks in demand to regional economies has been used extensively for nearly 30 years. We chronicle the development of Bartik-type shift-share instruments and examine the empirical performance of alternative versions that use different combinations of national shift and local share variables in their construction. We offer three main findings. First, instruments constructed from shares that omit employment in nontraded sectors empirically dominate versions that include total employment. Second, industrial sectors with high average shares and low variation across areas are more likely to be nontraded and endogenous. This suggests placing large weights on nontraded sector shares worsens both relevance and potential endogeneity. Finally, we demonstrate national shifters other than employment, such as prices and wages, can be used to construct instruments with unique and relevant explanatory power.