The Impact of Capital Expenditures on Property Performance in Commercial Real Estate

38 Pages Posted: 8 Apr 2016

See all articles by Chinmoy Ghosh

Chinmoy Ghosh

University of Connecticut - Department of Finance

Milena T. Petrova

Bocconi University

Date Written: March 2015

Abstract

Using a sample of 47,260 annual and 12,276 unique property observations during 2000 – 2011 we analyze the relationship between capital expenditures and performance by employing 2SLS models, in which capital expenditures are modeled as a function of property characteristics (age, square footage, occupancy rate, leverage, leasing commissions, lagged returns and property type), market conditions (interest rates, credit spread and standard deviation of cap rates) and property fixed effects. We find persistently strong positive relationship between capital expenditures and excess NPI returns when controlling for the endogeneity of capital expenditures for industrial, office and retail properties. A further analysis reveals that this relationship is driven by the positive impact of building improvements and building expansions, while returns do not fully adjust to account for tenant improvements.

Keywords: investment, capital expenditures, performance, commercial real estate, uncertainty

Suggested Citation

Ghosh, Chinmoy and Petrova, Milena T., The Impact of Capital Expenditures on Property Performance in Commercial Real Estate (March 2015). Available at SSRN: https://ssrn.com/abstract=2759826 or http://dx.doi.org/10.2139/ssrn.2759826

Chinmoy Ghosh

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)
860-486-0349 (Fax)

Milena T. Petrova (Contact Author)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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