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

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  • Chinmoy Ghosh

    (University of Connecticut)

  • Milena T. Petrova

    (Bocconi University)

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 this 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.

Suggested Citation

  • Chinmoy Ghosh & Milena T. Petrova, 2017. "The Impact of Capital Expenditures on Property Performance in Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 55(1), pages 106-133, July.
    • Handle: RePEc:kap:jrefec:v:55:y:2017:i:1:d:10.1007_s11146-016-9560-5
    DOI: 10.1007/s11146-016-9560-5
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    Cited by:

    1. Zifeng Feng, 2022. "How Does Local Economy Affect Commercial Property Performance?," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 361-383, October.
    2. Liang Peng & Thomas G. Thibodeau, 2020. "Interest Rates and Investment: Evidence from Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 60(4), pages 554-586, May.
    3. Shaun A. Bond & James D. Shilling & Charles H. Wurtzebach, 2019. "Commercial Real Estate Market Property Level Capital Expenditures: An Options Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 59(3), pages 372-390, October.

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    More about this item

    Keywords

    Investment; Capital expenditures; Performance; Commercial real estate; Uncertainty;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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