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

Posted: 27 Jul 2017 Last revised: 3 Oct 2017

See all articles by Milena T. Petrova

Milena T. Petrova

Bocconi University

Chinmoy Ghosh

University of Connecticut - Department of Finance

Date Written: July 24, 2017

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. Our results reveal that while capital expenditures are mostly idiosyncratic and related to unique property characteristics, they are a significant determinant of property returns. 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 his relationship is driven by the positive impact of building improvements and building expansions, while returns in all property types do not fully adjust to account for tenant improvements.

Keywords: Investment; Capital Expenditures; Performance; Commercial Real Estate; Uncertainty

JEL Classification: G11; R33; D92

Suggested Citation

Petrova, Milena T. and Ghosh, Chinmoy, The Impact of Capital Expenditures on Property Performance in Commercial Real Estate (July 24, 2017). Journal of Real Estate Finance and Economics, Vol. 55, No. 1, 2017, University of Connecticut School of Business Research Paper No. 17-06, Available at SSRN: https://ssrn.com/abstract=3007823

Milena T. Petrova (Contact Author)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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)

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