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Understanding Commercial Real Estate: Just How Different from Housing Is It?

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  • 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.

Suggested Citation

  • Joseph Gyourko, 2009. "Understanding Commercial Real Estate: Just How Different from Housing Is It?," NBER Working Papers 14708, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14708
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    Cited by:

    1. repec:oup:jfinec:v:16:y:2018:i:1:p:34-62. is not listed on IDEAS
    2. Jack Corgel & Crocker Liu & Robert White, 2015. "Determinants of Hotel Property Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 51(3), pages 415-439, October.
    3. Michal Hlaváček & Ondřej Novotný & Marek Rusnák, 2016. "Analýza cen komerčních nemovitostí v zemích střední Evropy
      [Analysis of the Commercial Property Prices in the Central European Countries]
      ," Politická ekonomie, University of Economics, Prague, vol. 2016(1), pages 3-18.
    4. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, vol. 66(2), pages 75-89, September.
    5. Daniele Bianchi & Massimo Guidolin & Francesco Ravazzolo, 2018. "Dissecting the 2007–2009 Real Estate Market Bust: Systematic Pricing Correction or Just a Housing Fad?," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 16(1), pages 34-62.
    6. repec:mpr:mprres:7483 is not listed on IDEAS
    7. Justin Trogdon & Donatus Ekwueme & Sujha Subramanian & Wesley Crouse, 2014. "Economies of scale in federally-funded state-organized public health programs: results from the National Breast and Cervical Cancer Early Detection Programs," Health Care Management Science, Springer, vol. 17(4), pages 321-330, December.
    8. Michal Hlavacek & Ondrej Novotny & Marek Rusnak, 2014. "Office Property in Central European Countries," Occasional Publications - Chapters in Edited Volumes,in: CNB Financial Stability Report 2013/2014, chapter 0, pages 148-155 Czech National Bank, Research Department.
    9. repec:kap:jrefec:v:55:y:2017:i:3:d:10.1007_s11146-016-9587-7 is not listed on IDEAS
    10. Zeno Adams & Roland Füss & Felix Schindler, 2015. "The Sources of Risk Spillovers among U.S. REITs: Financial Characteristics and Regional Proximity," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 67-100, March.
    11. Grodecka, Anna, 2014. "Subprime borrowers, securitization and the transmission of business cycles," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100456, Verein für Socialpolitik / German Economic Association.
    12. Anna Grodecka, 2013. "Subprime borrowers, securitization and the transmission of business cycles," Bonn Econ Discussion Papers bgse07_2013, University of Bonn, Germany.
    13. Feler, Leo & Senses, Mine Zeynep, 2016. "Trade Shocks and the Provision of Local Public Goods," IZA Discussion Papers 10231, Institute for the Study of Labor (IZA).
    14. repec:bis:bisifc:46-31 is not listed on IDEAS
    15. Dennis Schoenmaker & Arno Vlist, 2015. "On real estate development activity: the relationship between commercial and residential real estate markets," Letters in Spatial and Resource Sciences, Springer, vol. 8(3), pages 219-232, November.
    16. Levitin, Adam & Wachter, Susan, 2012. "Explaining the Housing Bubble," MPRA Paper 41920, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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