The Heterogeneous Response of Real Estate Asset Prices to a Global Shock
The authors use new granular data to answer how large the pandemic shock in 2020 has affected the real estate market, in particular the rents and sale prices of real estate units.
Because of the relevance of real estate for the economy, an important question is how the large pandemic shock in 2020 affected the real estate market, in particular the rents and sale prices of real estate units. Did the pandemic shock in 2020 change the valuation of real estate assets, temporarily or persistently? Which repercussions of these changes do we have to expect? Did the pandemic exacerbate the affordability crisis for residential real estate or decrease the urban premium for commercial real estate? We use new granular data at the municipal level in Germany to answer these questions.
As a starting point, we observe that rents of residential and commercial real estate in Germany have changed considerably during the pandemic. Figure 1 shows that, between the fourth quarter in 2019 and the first quarter in 2021, rents for residential real estate increased between 2% and 9% across municipalities. For office and retail real estate, rents changed between -10% and +25%, thus exhibiting much more heterogeneity, including large decreases in rents in some municipalities. In Heiniger, Koeniger and Lechner (2022) we document similar patterns for sale prices.
Notes: The cities indicated on the map are abbreviated as follows. BER: Berlin, COL: Cologne, FRA: Frankfurt, HAM: Hamburg, MUN: Munich. Source: Own calculations based on data provided by 21st Real Estate, reproduced from Heiniger, Koeniger and Lechner (2022).
Based on the descriptive evidence in Figure 1, we investigate to which extent the observed different changes across municipalities can be attributed to the different epidemiological and economic incidence of the pandemic. To answer this causal question, we exploit data on the incidence of Covid infections and short time work measures at the municipal level. Applying causal machine learning techniques, we find that the impact of the pandemic on the real estate market in Germany has been far less drastic than in the United States.
Whereas existing studies for residential and commercial real estate in the U.S. show that prices in urban centers fell sharply during the pandemic, we show that the pandemic led to higher real estate valuations in Germany, especially for commercial properties in the premium urban segment. Rents in the first year of the pandemic fell only briefly for some property types.
We find that rents for retail real estate in municipalities with a high rather than low incidence of Covid infections have been 3.5% lower in the first quarter of 2021, one year after the pandemic started. We do not find a clear cut effect of the incidence of Covid infections on the rents for residential or office real estate instead. We further find that a high rather than low incidence of short time work reduced rents for offices by 3.2% in the first quarter of 2021 but had a positive effect on rents for residential and retail real estate.
The effects on prices of real estate units for sale in the same time period allow us to gauge whether the effect of the pandemic on rents has been expected to be shortlived, given that the fundamental value of real estate prices equals the present value of the stream of rents today and in the future. We find that the effect on prices of real estate units for sale has been negligible or very small when rents decreased, indicating that the reduction of rents for commercial real estate in the instances reported above has been expected to be only temporary.
Overall, we find that the incidence of the pandemic had negligible effects on the affordability crisis for residential real estate in Germany. We further find that the pandemic increased rather than decreased the urban price premium of commercial real estate that has been in the top segment of the price distribution prior to the pandemic.
One interpretation is that the negative demand shock for some real estate types during the first year of the pandemic in Germany has been (expected to be) only temporary. In particular, we do not find economically significant reductions in the collateral value of real estate on average, which suggests that the pandemic did not have a lasting impact on economic activity through this channel. A possible explanation for this finding in the German context is that government support programs for households and firms have been generous so that demand for real estate did not fall persistently.
The results suggest that the pandemic reduced demand for properties with urban characteristics less in Germany than in the United States. As a result, smaller changes in local tax revenues are to be expected in German cities than in the United States.
Reference
Heiniger, Sandro, Winfried Koeniger, Michael Lechner (2022): The Heterogeneous Response of Real Estate Asset Prices to a Global Shock.
About the authors
Sandro Heiniger is a PhD candidate at University of St. Gallen.
Winfried Koeniger is Professor of Economics and Co-Head of the Swiss Institute of Empirical Economic Research at the University of St.Gallen. He is research fellow at CESifo, the Center for Financial Studies, IZA, and faculty member of the Swiss Finance Institute. His research interests include macroeconomics, financial economics, consumption and saving decisions, and labor markets.
Michael Lechner is a Professor of Econometrics in St. Gallen. He is also co-head of the Swiss Institute for Empirical Economic Research (SEW), which is a research institute of the University of St. Gallen dedicated to empirical research.
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