Face-to-face Interactions, Tenant Resilience, and Commercial Real Estate Performance

Abstract

The COVID-19 pandemic has introduced an exogenous shock to the face-to-face (FTF) economy and the use of commercial space. By exploiting a new dataset that links tenants, commercial properties, and stakeholders (including equity holders and lenders) in these properties, we examine whether and how the dependence of commercial tenants’ business operations on FTF interactions affect commercial real estate performance during the pandemic. We construct three novel FTF measures at both the property and firm levels to capture remote working by tenants, internal communication between coworkers, and external contact with customers. We find that firms holding properties with tenants that are less resilient to social distancing experienced greater declines in abnormal returns in response to COVID spread (growth in the number of cases), more negative market reactions around lockdown and reopening announcements, and lower analyst earnings expectations. Evidence based on property-level mortgage spreads of collateralized loans is consistent with these findings. Our findings are unlikely to be explained by variation in a building’s property type or in a property-owning firm’s property-type focus.

Keywords: Commercial Real Estate, Face-to-Face Interactions, Tenant Resilience, Social Distancing, COVID-19 Pandemic

JEL Classification: G01, G11, G12, G14, R30