What Really Happens During Flight to Safety: Evidence from Real Estate Markets

Abstract

Flight to safety (FTS) affects the markets for risky assets such as stocks, corporate bonds, and commodities. Yet, little is known about the effects on commercial real estate. We show that REITs offer a partial hedge against FTS, with daily total returns being less sensitive to FTS than many other industries and measures of REIT liquidity actually improving on FTS days. However, a cluster of FTS days signals a decline in economic fundamentals in the long run. We find that the odds of a drop in REIT quarterly revenue increase by 15% after an FTS cluster, ceteris paribus. This effect persists for up to four quarters. We also find that commercial real estate price appreciation is all but wiped out over up to four quarters following an FTS cluster. Our findings benefit investors by providing estimates of the short-term return and liquidity response of REITs to FTS episodes, and by documenting long-term effects on REIT revenues and real asset values.

Keywords: Flight to Safety, Macro Finance, Capital Markets, Real Estate, Asset Pricing