The diversity yield – does mixed use really pay off?

In the past, investors and financial institutions often viewed mixed use properties critically, as these properties place higher demands on the assessment of the opportunity-risk profile and management than monofunctional properties. For some time now, a shift in the general perception of mixed use real estate seems to have occurred among investors and financiers, and this shift was aggravated by the COVID-19 pandemic, as many investors want their real estate portfolios to be stable and crisis-proof in the long term. At this point, mixed-use properties can offer advantages over monofunctionally used properties, by providing increased resilience regarding use-specific market cycles. This study adds to the understanding of this changing investor perceptions by examining the changing dynamics in commercial real estate transactions: In a combinatorial design we analyze two comprehensive datasets, including a total of around 2,200 commercial property transactions between 2013 and the first half of 2024 in Berlin and Frankfurt am Main (Germany). We measure the degree of mixed-use within commercial buildings by constructing fragmentation indices for the transacted properties in both cities. Our study provides insights on the temporal and spatial development in the commercial real estate market and whether there is a turning point in property transactions towards a higher degree of properties with a more diversified usage, especially after the COVID-19 pandemic. We further assess the impact of diversity in usage on the property values by estimating hedonic generalized additive regression models (GAM) to identify potential risk premiums. To ensure the robustness of our results we apply a tailored iterative multi-layer feature selection and robustness check procedure. We find that indeed mixed-use properties have been transacted increasingly and we can identify a small but statistically significant market premium compared to single-use assets in both cities. Finally, we find that city typologies and market conditions impact the dynamics of mixed use real estate transactions.