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Understanding commercial real estate : just how different from housing is it?

Author: Joseph E Gyourko; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2009.
Series: Working paper series (National Bureau of Economic Research), no. 14708.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
Recent sharp declines in owner-occupied housing prices naturally raise the question of whether something similar will happen to income-producing properties. It already has based on the nearly 60% decline in the share prices of publicly-traded, commercial property firms from their peak in early 2007. The core model of spatial equilibrium in urban economics suggests this should not be a surprise, as it shows that both  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Joseph E Gyourko; National Bureau of Economic Research.
OCLC Number: 301957694
Description: 1 online resource (46 pages) : illustrations, digital.
Series Title: Working paper series (National Bureau of Economic Research), no. 14708.
Responsibility: Joseph Gyourko.

Abstract:

Recent sharp declines in owner-occupied housing prices naturally raise the question of whether something similar will happen to income-producing properties. It already has based on the nearly 60% decline in the share prices of publicly-traded, commercial property firms from their peak in early 2007. The core model of spatial equilibrium in urban economics suggests this should not be a surprise, as it shows that both real estate sectors are driven by common fundamentals, which should make them perform similarly. On the other hand, stronger limits to arbitrage in housing suggest wider swings in prices unrelated to fundamentals are feasible in that property sector. The data find many more similarities than differences across the two real estate sectors. The simple correlation between appreciation rates on owner-occupied housing and commercial real estate is nearly 40%. Both sectors also exhibit similar time series patterns in their price appreciation, with there being persistence across individual years and mean reversion over longer periods. Commercial real estate capital structure looks to be quite weak due to high leverage combined with strong mean reversion in prices. The aggregate loan-to-value ratio on income-producing properties is about 75%. Estimated mean reversion in price appreciation of at least 25% over relatively short horizons suggests that normal change from the recent peak will leave little or no equity on average to cushion against any future negative shocks.

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