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Governmental Restrictions and Real Estate Investor Risk Perception
Carina Kaiser1, Julia Freybote2, Wolfgang Schäfers1
1International Real Estate Business School (IRE|BS), University of Regensburg, Universitaetsstr. 31, 93053 Regensburg, Germany.
The Journal of Real Estate Finance and Economics
|April 16, 2024
Summary
Governmental restrictions during COVID-19 impacted investor risk perception for regional malls, not neighborhood centers. States with Republican governors saw lower risk premiums due to fewer restrictions.
Area of Science:
- Real Estate Economics
- Public Policy
- Behavioral Finance
Background:
- Governmental restrictions during the COVID-19 pandemic created a unique scenario to study investor risk perception.
- The pandemic's varied impact across different retail property types necessitates understanding differential risk assessments.
- Political affiliation of state governors was used as a proxy for the stringency and duration of COVID-19 restrictions.
Purpose of the Study:
- To analyze how governmental restrictions influenced short-term investor risk perception in regional and neighborhood shopping centers.
- To determine if the type of retail property (regional mall vs. neighborhood center) affected this risk perception.
- To explore the role of political factors in shaping real estate investment decisions during a crisis.
Main Methods:
- Utilizing the COVID-19 pandemic as a natural experiment.
- Employing the going-in cap rate as a proxy for investor risk perception.
- Analyzing data from 40 metropolitan statistical areas (MSAs) across 27 states between 2018 and 2021.
Main Results:
- Investors in regional malls in states with Republican governors (fewer restrictions) demanded lower going-in cap rates compared to those in states with Democratic governors (more restrictions).
- This effect was not observed in neighborhood shopping centers, indicating their resilience to COVID-19 related restrictions.
- Mask mandates were identified as a significant factor, and no long-term impact on retail real estate investor risk perception was found.
Conclusions:
- Short-term investor risk perception for regional malls is sensitive to the stringency of governmental restrictions, particularly those related to public health measures.
- Neighborhood shopping centers exhibited greater stability in investor risk perception due to less direct impact from COVID-19 restrictions.
- The political leanings of an area can influence investor risk perception, highlighting the interplay between policy and financial markets.
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