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Research Focus
Real Estate Ownership by Non-Real Estate Firms: The Research Sponsor Program of the Zell/Lurie Real Estate Center has established the issue of corporate real estate ownership as one focus for our research. Zell/Lurie Director Joseph Gyourko and former Zell/Lurie Post-Doctoral Fellow Yongheng Deng recently participated in the Corporate Real Estate Portfolio Alliance, an interdisciplinary effort to better understand the reasons for and costs of corporate real estate ownership. A recently updated working paper originally done for the Alliance by Professors Gyourko and Deng, Real Estate Ownership by Non-Real Estate Firms: An Estimate of the Impact on Firm Returns provides the first empirical evidence on how real estate ownership affects shareholder value over the long term. Gyourko and Deng conclude that there is a negative impact of owning too much real estate, but only for relatively risky firms. Such firms, with relatively high real estate ownership concentrations as a percentage of all firm assets, have lower overall returns over a ten year holding period. By how much? The data suggest between 5 and 10 percent over the decade-long holding period. It is noteworthy that this finding does not imply that ownership of real estate per se negatively impacts shareholder value. Rather, it indicates that - for risky firms - ownership of more real estate than is typical for all firms in similar industries is what destroys value. Why is the impact apparent only for risky or high cost-of-capital firms? Deng and Gyourko suggest that owning real estate constitutes a very poor duration match for these firms. Since high cost-of-capital firms tend to be subject to more volatility over the cycle, it is likely that their real estate needs will vary considerably over the cycle, also. Consequently, real estate ownership implies a long-term commitment of scarce corporate capital that is an inappropriate match with these companies’ capital requirements over the cycle. Tying up capital in this manner can lead to firms missing out on profitable projects, resulting in lower returns in the long run.
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