Renewing a Lease at a Discount or Premium?

Siu Kei Wong and Ka Shing Cheung

Journal of Real Estate Research, 2017, vol. 39, issue 2, 215-234

Abstract: Occupancy discount is a long-accepted doctrine in literature. Search theory supports such a proposition, but the empirical evidence is mixed. In this study, we revisit this dilemma and put forward an alternative argument that a landlord may exploit tenants who have made non-redeployable investments and charge them an occupancy premium. Based on data of high-end commercial properties where quality information is symmetric, the findings confirm that the magnitude of discounts/premiums hinges on the tradeoff between asset specificity and search. We also demonstrate that instrumental variables estimation is a better approach to correcting endogeneity bias in lease renewal decisions.

Date: 2017
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DOI: 10.1080/10835547.2017.12091470

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