How Does Local Economy Affect Commercial Property Performance?

Abstract

Local economy should be an important determinant of commercial real estate (CRE) performance. This paper empirically examines how the economic conditions of a metropolitan area drive the performance of CRE in the area. This paper shows that areas with better economic conditions provide a higher total return on commercial properties than those with worse economic conditions. Further analysis indicates that both the income return and capital appreciation of CRE are significantly affected by the size of the economy (proxied as GDP level), while the capital return (but not income return) is significantly affected by the growth of the economy (proxied as GDP growth). The results are largely consistent in the Fama-MacBeth regression, the portfolio analysis, and the propensity score matching model, providing solid evidence on the important effects of local economy on CRE.

Keywords: Local Economy, Commercial Real Estate, Performance, GDP, NCREIF

JEL Classification: R30,G11