Commercial real estate finance and the lending cap rate

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jeffrey Stokes ◽  
Arthur Cox
Keyword(s):  
Real Estate ◽  
Simple Calculation ◽  
Commercial Real Estate ◽  
Debt Service ◽  
Real Estate Finance ◽  
Content Type ◽  
Property Valuation ◽  
Service Coverage ◽  
Cap Rate ◽  
Loan Amount

PurposeThe aim of this study is to report on a simple derivation that results in what the authors refer to as the lending cap rate. The lending cap rate is a unique cap rate resulting in a property valuation that perfectly aligns the maximum loan amount for the financing of commercial real estate.Design/methodology/approachThe derivation is the result of simple algebra relating the two most common underwriting ratios: debt service coverage and loan-to-value with the formula for the present value of an annuity. Numerical examples are presented to demonstrate the calculation of the lending cap rate, property valuation and maximum loan amount. The authors also present comparative statics results.FindingsThe main finding of this research is that once a lender knows the debt service coverage ratio, loan-to-value ratio and lending terms for a specific property financing request, a simple calculation reveals the lending cap rate and the property valuation that aligns the maximum loan amount implied by the two underwriting ratios.Practical implicationsOne practical implication of the research is that a simple calculation reveals the lending cap rate which facilitates timely property evaluations for lending purposes. The methods demonstrated also offer real estate finance educators a practical means of connecting the loan underwriting process with property appraisal thereby facilitating conceptual understanding.Originality/valueThe key finding is original, and the importance of the finding is that the determination of the lending cap rate is simple and has the ability to make commercial real estate lending faster and cheaper, especially in lending situations where an evaluation rather than an appraisal is appropriate.

A post-global financial crisis (GFC) framework for strategic planning, assessment and management decision making for US sustainable commercial real estate

2017 ◽  
Vol 35 (6) ◽  
pp. 589-618 ◽  
Author(s):  
Pernille Hoy Christensen
Keyword(s):  
Decision Making ◽  
Financial Crisis ◽  
Real Estate ◽  
Performance Indicators ◽  
Institutional Investors ◽  
Global Financial Crisis ◽  
Real Estate Market ◽  
Commercial Real Estate ◽  
Content Type ◽  
Sustainability Initiatives

Purpose The purpose of this paper is to understand both the facts and the values associated with the breadth of issues, and the principles related to sustainable real estate for institutional investors. Sustainable real estate is a growing sector within the commercial real estate industry, and yet, the decision-making practices of institutional investors related to sustainability are still not well understood. In an effort to fill that gap, this research investigates the post-global financial crisis (GFC) motivations driving the implementation of sustainability initiatives, the implementation strategies used, and the predominant eco-indicators and measures used by institutional investors. Design/methodology/approach This paper presents the results of a three-round modified Delphi study conducted in the USA in 2011-2012 investigating the nature of performance measurements and reporting requirements in sustainable commercial real estate and their impact on the real estate decision-making process used by institutional investors. Two rounds of in-depth interviews were conducted with 14 expert panelists. An e-questionnaire was used in the third round to verify qualitative findings. Findings The key industry drivers and performance indicators influencing institutional investor decision making were associated with risk management of assets and whether initiatives can improve competitive market advantage. Industry leaders advocate for simple key performance indicators, which is in contrast to the literature which argues for the need to adopt common criteria and metrics. Key barriers to the adoption of sustainability initiatives are discussed and a decision framework is presented. Practical implications This research aims to help industry partners understand the drivers motivating institutional investors to uptake sustainability initiatives with the aim of improving decision making, assessment, and management of sustainable commercial office buildings. Originality/value Building on the four generations of the sustainability framework presented by Simons et al. (2001), this research argues that the US real estate market has yet again adjusted its relationship with sustainability and revises their framework to include a new, post-GFC generation for decision making, assessment, and management of sustainable real estate.

scholarly journals What sells in a crisis? Determinants of sale probability over a cycle and through a crash

2017 ◽  
Vol 35 (6) ◽  
pp. 619-637 ◽  
Author(s):  
David Scofield ◽  
Steven Devaney
Keyword(s):  
Real Estate ◽  
Sample Selection ◽  
Sampling Technique ◽  
Real Estate Market ◽  
Commercial Real Estate ◽  
Content Type ◽  
Asset Selection ◽  
The Uk ◽  
Real Estate Cycle ◽  
Over Time

Purpose The purpose of this paper is to understand what affects the liquidity of individual commercial real estate assets over the course of the economic cycle by exploring a range of variables and a number of time periods to identify key determinants of sale probability. Design/methodology/approach Analyzing 12,000 UK commercial real estate transactions (2003 to 2013) the authors use an innovative sampling technique akin to a perpetual inventory approach to generate a sample of held assets for each 12 month interval. Next, the authors use probit models to test how market, owner and property factors affect sale probability in different market environments. Findings The types of properties that are most likely to sell changes between strong and weak markets. Office and retail assets were more likely to sell than industrial both overall and in better market conditions, but were less likely to sell than industrial properties during the downturn from mid-2007 to mid-2009. Assets located in the City of London more likely to sell in both strong and weak markets. The behavior of different groups of owners changed over time, and this indicates that the type of owner might have implications for the liquidity of individual assets over and above their physical and locational attributes. Practical implications Variation in sale probability over time and across assets has implications for real estate investment management both in terms of asset selection and the ability to rebalance portfolios over the course of the cycle. Results also suggest that sample selection may be an issue for commercial real estate price indices around the globe and imply that indices based on a limited group of owners/sellers might be susceptible to further biases when tracking market performance through time. Originality/value The study differs from the existing literature on sale probability as the authors analyzed samples of transactions drawn from all investor types, a significant advantage over studies based on data restricted to samples of domestic institutional investors. As well, information on country of origin for buyers and sellers allows us to explore the influence of foreign ownership on the probability of sale. Finally, the authors not only analyze all transactions together, but the authors also look at transactions in five distinct periods that correspond with different phases of the UK commercial real estate cycle. This paper considers the UK real estate market, but it is likely that many of the findings hold for other major commercial real estate markets.

scholarly journals Cap rates and risk: a spatial analysis of commercial real estate

2018 ◽  
Vol 35 (1) ◽  
pp. 25-43
Author(s):  
Florian Unbehaun ◽  
Franz Fuerst
Keyword(s):  
Real Estate ◽  
Risk Perceptions ◽  
Large Scale ◽  
Risk Premia ◽  
Real Estate Market ◽  
Commercial Real Estate ◽  
Data Series ◽  
Large Set ◽  
Content Type ◽  
The Impact

Purpose This study aims to assess the impact of location on capitalization rates and risk premia. Design/methodology/approach Using a transaction-based data series for the five largest office markets in Germany from 2005 to 2015, regression analysis is performed to account for a large set of asset-level drivers such as location, age and size and time-varying macro-level drivers. Findings Location is found to be a key determinant of cap rates and risk premia. CBD locations are found to attract lower cap rates and lower risk premia in three of the five largest markets in Germany. Interestingly, this effect is not found in the non-CBD locations of these markets, suggesting that the lower perceived risk associated with these large markets is restricted to a relatively small area within these markets that are reputed to be safe investments. Research limitations/implications The findings imply that investors view properties in peripheral urban locations as imperfect substitutes for CBD properties. Further analysis also shows that these risk premia are not uniformly applied across real estate asset types. The CBD risk effect is particularly pronounced for office and retail assets, apparently considered “prime” investments within the central locations. Originality/value This is one of the first empirical studies of the risk implications of peripheral commercial real estate locations. It is also one of the first large-scale cap rate analyses of the German commercial real estate market. The results demonstrate that risk perceptions of investors have a distinct spatial dimension.

scholarly journals Blockchain technology in commercial real estate transactions

2019 ◽  
Vol 37 (6) ◽  
pp. 570-579 ◽  
Author(s):  
Hugo Pieter Wouda ◽  
Raymond Opdenakker
Keyword(s):  
Real Estate ◽  
Design Science ◽  
Science Research ◽  
Commercial Real Estate ◽  
Office Building ◽  
Content Type ◽  
Blockchain Technology ◽  
Transaction Process ◽  
Current Transaction ◽  
Pain Points

Purpose The transaction process of an office building is known to be time consuming and inefficient, in part due to the lack of market transparency. The purpose of this paper is to focus on the development of a blockchain application that can improve the transaction process of office buildings in the Netherlands. Design/methodology/approach Conducting design science research, the current transaction process of an office building and status quo of blockchain technology in real estate is investigated. Subsequently, multiple parties are interviewed to define major pain points within the process. The interview findings are used to design a blockchain solution which overcomes the aforementioned pain points. After designing, the interviewees are asked again to pragmatically validate the proposed model. Findings One of the major pain points identified concerning the transaction process of an office building is that it is difficult to define the characteristics of a property, due to lack of data structure and quality. The proposed application improves the way specific assets are understood by structuring physical and contractual information in one place and guarantees the quality of the data by using the blockchain mechanisms. Practical implications A blockchain application is proposed, which can improve the transaction process of an office building. Originality/value Recent studies indicate that blockchain technology could lead to improvements in efficiency, transparency and therefore trust within the transaction process. Therefore, the proposed application is of value for the future of real estate data management and the transaction process.

Does the commercial real estate industry need “more pussy on the block?”

2019 ◽  
Vol 37 (5) ◽  
pp. 627-637 ◽  
Author(s):  
Dustin C. Read
Keyword(s):  
Real Estate ◽  
Gender Bias ◽  
Second Generation ◽  
Commercial Real Estate ◽  
Real Estate Industry ◽  
Structured Interviews ◽  
Content Type ◽  
Local Chapter ◽  
Professional Credibility ◽  
The Impact

Purpose In a controversial 2018 interview, commercial real estate mogul Sam Zell insinuated that companies should promote their employees based exclusively on merit and avoid purposefully taking steps to get “more pussy on the block” in the name of gender equality. The comment was criticized not only for its crassness, but also for its failure to recognize the challenges many women working in the commercial real estate industry face in their efforts to obtain the same opportunities, compensation and status as similarly-qualified men. In an effort to overcome these disparities, the purpose of this paper is to focus on the pervasiveness of second-generation gender bias and stereotyping in the field through a qualitative analysis. Design/methodology/approach Semi-structured interviews were conducted with 39 women serving as local chapter presidents of a prominent commercial real estate trade group to explore the impact of gender on their career advancement and their experiences with second-generation gender bias. Findings The findings suggest unintentional discrimination often influences women’s careers by drawing their communication skills, professional credibility and commitment to the organizations for whom they work into question. Originality/value The research contributes to the existing literature by offering additional evidence that unintentional discrimination is common in male-dominated industries, such as commercial real estate. It also provides clear examples of social cues women perceive to heighten tension along gender lines and impinge upon their ability to ascend to leadership positions.

Capitalisation rates for commercial real estate investment decisions

2015 ◽  
Vol 33 (3) ◽  
pp. 242-255 ◽  
Author(s):  
John McDonald
Keyword(s):  
Real Estate ◽  
Commercial Real Estate ◽  
Office Buildings ◽  
Office Building ◽  
Vacancy Rate ◽  
Recent Past ◽  
Content Type ◽  
Empirical Results ◽  
Real Estate Valuation ◽  
Capitalization Rate

Purpose – The purpose of this paper is to present a basic model of commercial real estate valuation in which the capitalization rate is the critical variable, and to present empirical results for a study of office building capitalization rates. Design/methodology/approach – The model is derived from standard economic and financial theories. The empirical study uses data from the sale of office buildings in 37 downtown markets for 2012. The empirical results are related to concepts of asset market efficiency. Findings – The empirical results show that capitalization rates depend on features of the office buildings, vacancy rate, and recent change in the office building market as captured by the vacancy rate. In other words, investors are using variables implied by standard economic and financial theory and basic economic data from the recent past to determine the capitalization rate. Practical implications – The empirical results show how investors determine capitalization rates for office buildings, so potential investors can gauge the state of a property market. Originality/value – The paper shows that changes in capitalization rates are predictable; investors use past data to adjust their capitalization rates. Furthermore, if an investor does not agree that current trends will continue, then the investment decision should be determined accordingly. For example, if an investor thinks that the future will not be as robust as the recent past, then other investors will bid more than the investor thinks is reasonable. However, if the investor sees a future that is brighter than the recent past, it is time to buy.

Application of DSM in process management of a PE commercial real estate development project

2018 ◽  
Vol 36 (1) ◽  
pp. 20-36
Author(s):  
Guofeng Ma ◽  
Tiancheng Zhu
Keyword(s):  
Real Estate ◽  
Process Model ◽  
Process Management ◽  
Development Project ◽  
Commercial Real Estate ◽  
Real Estate Development ◽  
Content Type ◽  
Design Structure ◽  
Dependency Model ◽  
Objective Basis

Purpose After the drawbacks in the process management of China PE commercial real estate development project are analyzed, it is necessary to introduce a more integrated and advanced tool to solve them. The paper aims to discuss this issue. Design/methodology/approach A standard process model was proposed first. Based on the model, a coupled activity dependency model was also built by structural tool design structure matrix (DSM), the detailed matrix involving 119 activities and 322 information dependencies. Next, two large processes coupled blocks were generated by the sequencing algorithm and tearing algorithm. Then, the general simulation framework with rework probability and rework effect was introduced to do empirical research for one of the activities blocks due to the merit of solving rework of DSM. Findings These results showed that key activities were rearranged, that information interactive scope for them was optimized and that collaborative organization interface was built. And the expected duration after simulation was 131 days at 90 percent percentile, providing the objective basis of process arrangement to some extent and decreasing the risk of prospective yields during fund period. Originality/value This paper is a qualitative and quantitative practical research for the process management of PE commercial real estate development projects in China based on a real project which has begun construction in 2014.

Do cross-border investors benchmark commercial real estate markets?

2020 ◽  
Vol 13 (1) ◽  
pp. 83-103
Author(s):  
Cay Oertel ◽  
Jonas Willwersch ◽  
Marcelo Cajias
Keyword(s):  
Relative Risk ◽  
Real Estate ◽  
Risk Premia ◽  
Commercial Real Estate ◽  
Target Market ◽  
Nonlinear Relationship ◽  
Content Type ◽  
Real Estate Markets ◽  
Cross Border ◽  
Relative Attractiveness

Purpose The purpose of this study is to introduce a new perspective on determinants of cross-border investments in commercial real estate, namely, the relative attractiveness of a target market. So far, the literature has analyzed only absolute measures of investment attractiveness as determinants of cross-border investment flows. Design/methodology/approach The empirical study uses a classic ordinary least squares estimation for a European panel data set containing 28 cities in 18 countries, with quarterly observations from Q1/2008 to Q3/2018. After controlling for empirically proven explanatory covariates, the model is extended by the new relative measurement based on relative yields/cap rates and relative risk premia. Additionally, the study applies a generalized additive mixed model (GAMM) to investigate a potentially nonlinear relationship. Findings The study finds on average a ceteris paribus, statistically significant lagged influence of the proxy for relative attractiveness. Nonetheless, a differentiation is needed; relative risk premia are statistically significant, whereas relative yields are not. Moreover, the GAMM confirms a nonlinear relationship for relative risk premia and cross-border transaction volumes. Practical implications The results are of interest for both academia and market participants as a means of explaining cross-border capital flows. The existing knowledge on determinants is expanded by relative market attractiveness, as well as an awareness of nonlinear relationships. Both insights help to comprehend the underlying transaction dynamics in commercial real estate markets. Originality/value Whereas the existing body of literature focuses on absolute attractiveness to explain cross-border transaction activity, this study introduces relative attractiveness as an explanatory variable.

scholarly journals Information for decision-making in in-house and outsourced real estate management organisations

Facilities ◽  
2016 ◽  
Vol 34 (13/14) ◽  
pp. 891-905 ◽  
Author(s):  
Peter Palm
Keyword(s):  
Real Estate ◽  
Decision Maker ◽  
Commercial Real Estate ◽  
Decision Makers ◽  
Content Type ◽  
The Real ◽  
The Real Estate ◽  
Real Estate Sector ◽  
Estate Management ◽  
Real Estate Management

Purpose The purpose of this paper is to examine how the real estate owner (decision maker) insures being able to make informed decisions and how they differ according to organisational form. Design/methodology/approach This research is based on an interview study of nineteen firm representatives, six decision makers and thirteen management representatives, all from Swedish commercial real estate sector. Findings The study concludes that, regardless of organisational setting, the industry has a plan regarding handling information. The decision makers have all secured themselves access to the required/desired information. How this is done and what kind of information it is however differ, if the real estate management is in-house or outsourced. Furthermore, a clear focus on financial and contractual information is evident in both organisational settings. Research limitations/implications The research in this paper is limited to Swedish commercial real estate sector. Practical implications The insight the paper provides regarding required information can shed light on how information systems are built and how to improve your information sharing. Originality/value It provides an insight regarding how the industry, depending on organisation setting, prioritises different information and how the decision maker secures access to it.

scholarly journals The impact of lease structures on the optimal holding period for a commercial real estate portfolio

2015 ◽  
Vol 33 (2) ◽  
pp. 121-139 ◽  
Author(s):  
Charles-Olivier Amédée-Manesme ◽  
Michel Baroni ◽  
Fabrice Barthélémy ◽  
Mahdi Mokrane
Keyword(s):  
Real Estate ◽  
Portfolio Management ◽  
Cash Flows ◽  
Commercial Real Estate ◽  
Content Type ◽  
Holding Period ◽  
Specific Risk ◽  
The Impact ◽  
Real Estate Assets ◽  
Rental Value

Purpose – The purpose of this paper is to demonstrate the impact of lease duration and lease break options on the optimal holding period for a real estate asset or portfolio. Design/methodology/approach – The authors use a Monte Carlo simulation framework to simulate a real estate asset’s cash flows in which lease structures (rent, indexation pattern, overall lease duration and break options) are explicitly taken into account. The authors assume that a tenant exercises his/her option to break a lease if the rent paid is higher than the market rental value (MRV) of similar properties. The authors also model vacancy duration stochastically. Finally, capital values and MRVs, assumed to be correlated, are simulated using specific stochastic processes. The authors derive the optimal holding period for the asset as the value that maximizes its discounted value. Findings – The authors demonstrate that, consistent with existing capital markets literature and real estate business practice, break options in leases can dramatically alter optimal holding periods for real estate assets and, by extension, portfolios. The paper shows that, everything else being equal, shorter lease durations, higher MRV volatility, increasing negative rental reversion, higher vacancy duration, more break options, all tend to decrease the optimal holding period of a real estate asset. The converse is also true. Practical implications – Practitioners are offered insights as well as a practical methodology for determining the ex-ante optimal holding period for an asset or a portfolio based on a number of market and asset-specific parameters including the lease structure. Originality/value – The originality of the paper derives from its taking an explicit modelling approach to lease duration and lease breaks as additional sources of asset-specific risk alongside market risk. This is critical in real estate portfolio management because such specific risk is usually difficult to diversify.

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