Working Papers

"The role of tenant characteristics in retail cap rate variation"
Mariya Letdin, Stacy Sirmans, Greg Smersh, Tingyu Zhou
Written: May 2022 | https://dx.doi.org/10.2139/ssrn.4119899

Abstract
This study examines the variation in cap rates for single tenant net lease (STNL) properties. Despite an abundant literature on micro- and macroeconomic factors that influence capitalization rates, little is known about tenant and location-specific risk pricing, especially for smaller, single-tenant commercial properties. Using a unique dataset of more than 8,200 single-tenant retail property transactions from 2005 to 2019 in the United States, we quantify the risk associated with tenant characteristics, including the listing status of the parent company, ownership structure, default risk, and industry type. Our results show that these tenant characteristics play an important role in explaining cap rate variations.


"Loss aversion and focal point bias: Empirical evidence"
Stephen Ross, Tingyu Zhou
Written: March 2022 | https://dx.doi.org/10.2139/ssrn.4072887

Abstract
Recent research suggests that loss aversion may arise from anchoring or inattention, consistent with bounded rationality. Focal point bias (focus on round numbers or left digits) represents a well-documented, bounded rationality driven behavioral bias. We estimate a strong conditional correlation between an estimated loss aversion parameter and reporting round numbers using data from an earlier experiment. Then, we examine the effects of expected losses on housing sales prices, and we find that the positive effects of facing a loss on the eventual sales price are larger for sellers who selected a round mortgage amount during their initial purchase.


"Loss aversion in housing sales prices: Evidence from focal point bias"
Stephen Ross, Tingyu Zhou
Written: May 2021 | https://www.nber.org/papers/w28796

Abstract
Estimates of loss aversion in housing sales prices may be biased because expected losses correlate with housing and borrower unobservables. We provide new evidence of loss aversion in sales price by differencing loss aversion estimates between sellers who exhibit focal point bias in their initial mortgage amount and those who do not. Although focal point bias and loss aversion are associated with different families of behaviors, recent evidence suggests links between these biases. Revisiting experimental data, subjects with high levels of loss aversion were more likely to use round numbers. Using housing data, estimates of loss aversion are 10 percentage points higher for sellers with round number mortgage amounts as a share of expected loss. Differences in expected loss are balanced over both housing and mortgage attributes, are stable as additional of controls are added, and are robust to using a discontinuity style regression centered on mortgage amounts of round numbers. On the other hand, traditional estimates of loss aversion fall by as much as 73 percent as additional controls are added. This study provides unique evidence that loss aversion and focal point bias are found together, and presents new, more robust evidence that loss aversion influences housing sales prices.


"How do institutional investors react to geographically dispersed information shocks: A test using the COVID-19 pandemic"
David Ling, Chongyu Wang, Tingyu Zhou
Written: March 2021 | https://dx.doi.org/10.2139/ssrn.3812726

Abstract
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 assets in which the REITs were invested and the 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 non-passive and short-term investors may have overreacted to the local shocks because their REIT portfolios underperformed relative to passive and long-term investors. Our study highlights the importance of geography in the formation of investors expectations during market crises.


"Conflicts of interest and agent heterogeneity in buyer brokerage"
Lawrence Kryzanowski, Yanting Wu, Tingyu Zhou
Written: March 2021 | https://dx.doi.org/10.2139/ssrn.3805973

Abstract
This paper investigates the incentives of agents working with buyers (buying agents) under the fixed percentage commission system (FPCS) 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 agents prediction accuracy regarding their clients 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.


"Face-to-face interactions, tenant resilience, and commercial real estate performance"
Chongyu Wang, Tingyu Zhou
Written: December 2020 | https://dx.doi.org/10.2139/ssrn.3743818

Abstract
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 post-pandemic CRE performance.


"Asset productivity, local information diffusion, and commercial real estate returns"
David Ling, Chongyu Wang, Tingyu Zhou
Written: July 2020 | https://dx.doi.org/10.2139/ssrn.3628872

Abstract
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 a 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 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 property portfolio returns 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 firms assets is capitalized into stock prices.


"Mortgage relief: Who CARES?"
Mariya Letdin, Meagan McCollum
Written: July 2020 | https://dx.doi.org/10.2139/ssrn.3645498

Abstract
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides mortgage forbearance relief to qualifying borrowers, whose loans are placed in a government backed mortgage pool. We analyze the effects of being ineligible for the program by examining the aftermath of the same requirement in the Home Affordable Refinance Program (HARP). Using a comparable sample of borrowers with Freddie Mac loans and privately securitized loans (Bbx) 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 modification 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.


"A first look at the impact of COVID-19 on commercial real estate prices: Asset-level evidence"
David Ling, Chongyu Wang, Tingyu Zhou
Written: June 2020 | https://dx.doi.org/10.2139/ssrn.3593101

Abstract
This is the first paper to examine the transmission of an asset market shock to the capital markets during the COVID-19 pandemic. Using a novel measure of the exposure of commercial real estate portfolios (CRE) to the growth in COVID-19 (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 one-to-three-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
Written: May 2020 | https://dx.doi.org/10.2139/ssrn.3600365

Abstract
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 dominate 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.


"A first look at the impact of COVID-19 on commercial real estate prices: Asset-level evidence"
David Ling, Chongyu Wang, Tingyu Zhou
Written: May 2020 | https://dx.doi.org/10.2139/ssrn.3593101

Abstract
This is the first paper to examine the transmission of an asset market shock to the capital markets during the COVID-19 pandemic. Using a novel measure of the exposure of commercial real estate portfolios (CRE) to the growth in COVID-19 (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 one-to-three-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.


"House prices, government quality, and voting behavior"
Daniel Broxterman, Trenton Chen Jin
Written: April 2020 | https://dx.doi.org/10.2139/ssrn.3552879

Abstract
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 a control board raised appreciation rates in the District by 178 to 254 basis points. 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 administration's supporters had not voted in accord with economic self-interest.


"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
Written: February 2020 | https://dx.doi.org/10.2139/ssrn.3536604

Abstract
Communities worldwide have been wrestling with issues associated with chain stores proliferation. Many have explored and enacted chain store entry barriers in response, but how such regulations affect mom-and-pop businesses is still largely debated. The impact of chain store entry barriers on independent businesses is 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 character, we examine the effect of Formula Business Restrictions (FBR), a type of an American land use regulation that restricts the entry of "formula businesses," defined as businesses offering and utilizing a standardized set of merchandise, services, and design. We find that the passage of FBR led to higher number and percentage of employees working in mom-and-pop businesses. This positive effect occurred over time with increasing magnitude. We also find that FBR had heterogeneous effects on different industry groups. For example, FBR had strong positive effects on retail mom-and-pop stores, but not on the service sector. Lastly, we show that FBR helped mom-and-pop businesses primarily by protecting existing ones from downsizing. These findings suggest that chain store entry barriers can be beneficial for independent businesses located in small towns with unique community character, but policymakers must be cautious of its varying effects on different industry groups.


"Examining omitted variable bias in anchoring premium estimates: Evidence based on assessed value"
Tingyu Zhou, John Clapp, Ran Lu-Andrews
Written: February 2020 | https://dx.doi.org/10.2139/ssrn.3534732

Abstract
We propose a new assessed value approach to control for the amount of persistent unobserved quality. We apply our approach to a well-established two-stage framework developed by Genesove and Mayer (GM, 2001), who test the effect of an expected loss on final transaction prices in the housing market. We show that our assessed value model effectively mitigates the omitted variable bias and produces similar results as GM when the first-stage residual is included. Importantly, our 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.

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