Energy Factors, Leasing Structure and the Market Price of Office Buildings in the U.S.

June 15, 2011 - 12:00pm
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The talk will cover the results from an empirical paper that analyzes the relationship between energy factor markets, leasing structures and the transaction prices of office buildings in the {U.S.} We employ a large sample of 15,133 office building transactions that occurred between 2001 and 2010. In addition to building characteristics, we also include information on the operating expenses, the net operating income, and the market capitalization rates at sale to estimate an asset pricing model for commercial office real estate assets. A further set of important controls in our analysis is the one-to-twelve month forward contract prices and the shape of the forward contract price curve, using auction data for the regional electricity trading hubs in which the building is located and data from the Henry Hub for natural gas. We also include weather metrics in the form of the variance in the last twelve months of minimum and maximum temperature and precipitation for each building's location and sale date. Our final set of controls includes information on the dominant leasing structures in the buildings. Our empirical results suggest that Energy Star labels do not explain additional variance in property prices once the key asset pricing factors of expenses, income and market capitalization rates are included. Energy factor market prices, the shape of the energy price curves, and weather metrics are consistently shown to be statistically significant determinants of office building transaction prices, suggesting that commercial office building prices are likely to be exposed to shocks in these markets. Our findings have important implications for underwriting commercial mortgage default risk and I plan to briefly discuss how we are incorporating these results into mortgage valuation models.

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