Research Insights

The Impact of Hurricanes on the Value of Commercial Real Estate

Business Economics (2021)

Highlights: Commercial real estate investors prefer coastal, gateway, markets for liquidity, demand density, and durable returns. Yet, these areas are more vulnerable to the effects of climate change from more intense and frequent weather events such as hurricanes and typhoons as well as to gradual changes such as sea-level rise. Recognition is growing of the risks that these events pose to investment performance, but little is known about how this risk has impacted property values and returns when an event such as a hurricane occurs. This is the first study to analyze the impact on property values and returns from hurricanes causing the most significant damage by value over the past 30-plus years throughout the nation. Using individual property data from the National Council of Real Estate Investment Fiduciaries database, we find a significant impact on the value and rates of return, after accounting for any additional capital expenditures for repairs, for properties that are in areas impacted by a hurricane, relative to areas that were not impacted by a hurricane. These impacts vary by property type and can last for several years after the hurricane hit land in the area.

No Encore for Non-core? Property-level Returns in the Private Real Estate Market

2020 Real Estate Research Institute funded research

Highlights: Investment managers charged with allocating institutional capital to private equity real estate are fundamentally focused on the relationship between the risk and return of a prospective investment. As additional risk is undertaken, there is a reasonable expectation that they are compensated through an ex-post return, appropriately adjusted for the risk. The expectation that increased risk will be compensated through additional return is sacrosanct in the industry, but prior research is beginning to suggest that while the investment may underwrite to these return levels, the realized return might be a different (and less attractive) story altogether. In this paper, we examine property level cash flow data and construct returns for assets within the NCREIF property database. We define assets within the database as either core or noncore and document that even in raw returns, core properties outperform non-core properties. The surprising result is widespread and robust. Core properties outperform across a wide range of property characteristics as well as across time. The results hold using either quarterly property level returns or calculating property-specific IRRs. Overall, our results provide strong evidence that even on an absolute return basis, core properties seem to outperform non-core properties.