Pricing of Cashflow Certainty: Evidence from Private Commercial Real Estate Transactions

Bas Hilgers

ERES from European Real Estate Society (ERES)

Abstract: The recent volatility in real estate has again brought into sharp focus the importance of security of income streams on the value of commercial real estate. The aim of this study is to empirically investigate the impact of cashflow related certainty factors on the pricing of commercial property. In particular, we look at the value of initial occupancy and remaining lease term. We hypothesize that these asset-level risk factors significantly affect the prices and that the marginal effects differ over space and time. Using a unique dataset of private office, industrial and retail transactions from 2010 through 2021 we find that for every additional year of lease term remaining the value of a property is on average 2.6% higher. Similarly, for every 10 percent of additional space let the price is 0.8% higher. We furthermore find that the coefficients remain significant over both space and time, but its effect is lower in prime markets and up-cycles suggesting more optimism. The results imply that the risk premium, which is often seen as a ’black box’, can be decomposed into components allowing for more transparency in both the transaction and valuation process.

Keywords: commercial real estate; Lease term; occupancy; Risk Premium (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2023-01-01
New Economics Papers: this item is included in nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2023_324

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