American Real Estate And Urban Economics Association (AREUEA) Conference 2022 - Trinity College Dublin
After a long hiatus of in-person conferences, last week’s American Real Estate and Urban Economics Association (AREUEA) 2022 at Trinity College Dublin was certainly a highlight on the conference agenda! Well, it fully lived up to our (high) expectations! Here are some highlights and insights on cutting-edge real estate research!
In the post-COVID era, many working-from-home implications have been discussed – on health, productivity and for real estate. Stijn Van Nieuwerburgh (Columbia University) discussed the “apocalyptic effect” of work from home on office real estate: conditional on already working from home, the probability of continuing to work from home could be as much as 80%, based on current office REIT values. And if this parameter is accurate, it has immense implications for the future of office real estate! The current data suggest a modest and recovering effect on new office space let contracts, but older office spaces are already and will be expected to be in big trouble for the foreseeable future. The implications are indeed large, a 28% long-term decline in value comes down to a value destruction in the $500 billion range.
Shifts in work-from-home preferences might also lead to shifts in residential real estate preferences too: Brent Smith and Manu Gupta (Virginia Commonwealth University) presented exploratory data showing how real estate value drivers have changed over time. Their findings? The shift to work from home has accelerated a preference shift that already grew over time in the decades before the pandemic: Evolution, not revolution. We have started to value space more (larger homes no longer sell at a lower price/m2), care less about the number of bedrooms (we can work anywhere in the house, as long as it's big enough), and put less of a premium on living close to cities. Of course, our in-house expert Alex Xudong Sun underlined that, wherever we decide to work, indoor air quality should be on the top of the priority list. His work proved to be on a top list itself: Alex won the second-place AREUEA Best Paper Award!
The aesthetics of real estate were discussed in a very interactive session with Thies Lindenthal (Cambridge University). Ilir Nase (Oxford Brookes University) opened with a review discussing the value of a view in high-rise residential real estate comparing Rotterdam with Manhattan. Preliminary results suggest that higher-floor apartments are valued more in Manhattan, but the approach to proxy view with floors might still need fine-tuning. Thies in turn showed a machine learning approach to distill the utility of aesthetic properties and the effect of these factors on valuation. With a Tinder-like swiping app, he finds that beauty truly lies in the eye of the beholder: with some exceptions, there does not seem to be a very outspoken taste in the general population. The findings from their swiping app serve as input to predict aesthetic taste, where the ML algorithm is able to predict the valuation to some extent. This opens doors for future exploration!
Particularly interesting was a session on the role of regulation in the housing market. Vera Baye of Osnabruck University exploited the introduction of rent caps in the German rental market to look at the effect of such rent caps (currently discussed in many countries, including the Netherlands) on affordability and supply. Interestingly, the German regulation proved to be an incentive for developers to build more unregulated housing (new homes and apartments were not subject to rent caps), leading to, on average, stronger rent growth in the rental market (so: less affordability). Tsur Somerville presented a paper on the impact of taxation of foreign buyers (akin to taxing investors in the housing market). Such tax, introduced in Vancouver in 2016, led to slower price appreciation in neighborhoods where foreign buyers were traditionally more active (by about 6%) and significantly lower sales volumes. But, prices still went up rapidly, as local buyers stepped into the void.
Finally, the topic of sustainability and climate change and their impact on the real estate sector was covered. For example, Rodrigo Martinez-Mazza of Uppsala University presented his findings on the effect of floods on urban development and urban density in Spain. Interestingly, he concludes that public authorities continue to grant development permits in flood-prone areas (even after a flood) and that urban development increases following a flood. Next to that, the density of this redevelopment and the value of these buildings are also higher. Thus, economic activity is not driven away from areas affected by floods, even the opposite holds. This could be related to investment in the affected area that creates an area of higher quality, increasing popularity. In order to partially mitigate the climate change consequences, Linde Kattenberg presented her study on home insulation and its effect on gas consumption. The results show that home insulation yields on average a 20% reduction in the gas bill. Moreover, the returns to investment and payback period are very beneficial, even more under the current gas prices.