Interest Rates and Investment: Evidence from Commercial Real Estate

Real options and the perverse effect of interest rates on investment timing

“…In particular, the initial value of the state variable crucially affects the interest rate/investment relationship, favouring the perverse effect when it is sufficiently low. Our results find empirical validation in Kropp and Power (2016) and Peng and Thibodeau (2016).…”

“…Capozza and Li (1996) empirically document the existence of the perverse response in the real estate sector, finding that more than 25% of the observations fall in the perverse interest rate response region. Peng and Thibodeau (2016) also provide empirical support to the theoretical results in the real estate sector 9 . They show that decreasing the interest rate has a weaker stimulating effect on investment when interest rates are low, in concordance with Proposition 2, and where property prices are high, in concordance with Proposition 1(b).…”

Economic Fundamentals, Capital Expenditures and Asset Dispositions

“…For example, Bond, Shilling, and Wurtzebach (2014) find that CAPEX increase with market lease rates and our work is consistent with their findings. In addition, Peng and Thibodeau (2011) and Ghosh and Petrova (2015) find that capital expenditures decrease in the level of economic uncertainty, which increases the value of the option to delay improvements. Our work extends these prior studies in two ways.…”

The Relationship between Corporate Real Estate and Economic Cycle

“…The operating expenses, unemployment rates, and GDP have a negative relationship with the total returns and capital growths; the decrease in the capital growths and total returns will result in an increase in the related operating expenses, unemployment rates, and the gross domestic product of the South Africa. Peng and Thibodeau (2016) explored the impact of the fluctuation of the interest rate on irreversible investment in commercial properties. The authors used an historical data of quarterly capital improvements on 1,416 income producing properties between 1978 and 2009.…”

“…The authors used an historical data of quarterly capital improvements on 1,416 income producing properties between 1978 and 2009. The authors discovered that there is a strong non-monotonic effect of interest rate on office space, retail, and apartment, but on the industrial, they found that there is no monotonic effect; they also reveal that a decline in the treasury yield will dramatically escalate capital improvements only if those properties values are high, but if the properties values are low, the effects of the treasury yield might be negative or weak (Peng & Thibodeau, 2016). According to the authors, these findings have significant implications for fiscal and monetary policies; the conclusion drawn from the data collected is that a decline in interest rate does not necessarily attract investment.…”