The Commercial Real Estate Eco-System

The decade between the Global Financial Crisis (GFC) and the Covid-19 pandemic was a strong one for commercial real estate (CRE). Commercial property prices and transaction volumes recovered strongly and went on to exceed pre-GFC levels. Covid-19 briefly dented CRE valuations, but commercial property values recovered swiftly, not least due to unprecedented government intervention.

Low interest rates are often painted as a key driving force behind valuations. However, evidence from both private CRE transactions and US REITS is inconsistent with lower interest rates resulting in a lower cost of capital. In public markets, a rise in risk premia offsets most of the decline in interest rates and points to frothy expectations about future income growth. An alternative view is that valuation ratios were driven up by a changing composition of buyers in CRE markets, including private equity real estate funds as well as cross-border investors.

Professor Stijn will propose a new model of CRE valuations that augments the standard hedonic model of valuation driven by property characteristics with investor characteristics. Professor Stijn will also use tools to estimate what asset characteristics are most valuable to what investor types. In addition, Professor Stijn will attempt to use the model to help us understand what influence foreign investors and large PE funds have had on CRE prices in gateway markets.