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

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