Working from home and commercial real estate

Evidence from the stock markets

Stanimira Milcheva
Lingshan Xie
Working from home (WFH) caused huge disruption to working patterns as a result of lockdowns in the early stages of the Covid-19 pandemic. Workplace mobility in Berlin, London and Paris went down by more than 80% between February and March 2020, according to Google Mobility data. However, the effects of WFH are not yet understood. The reaction on stock markets can serve as an early indication of investors’ expectations about the real impacts on WFH.
In a recent article ‘Work from Home and Commercial Real Estate – Evidence from Stock Markets’ published in the EPRA journal, professor Stanimira Milcheva and research fellow Lingshan Xie from UCL assess how WFH exposure of real estate investment trusts (REITs) in Germany, France and the UK affected their performance. The authors find that WFH exposure through their property portfolio or through their tenants leads to significantly negative abnormal returns for REITs independently of their domicile, sector specialization or CBD exposure. Their results suggest that investors perceive WFH alone to negatively affect real estate company valuations, controlling for a host of idiosyncratic and systematic risks. REIT portfolio composition matters to determine to what extent a company will be more or less impacted by WFH when calibrating with the tenants who will be more likely to adopt WFH policies.
Measuring WFH exposure
The novelty of this research constitutes in the way the authors measure REIT level WFH exposure. The authors use WFH announcements of major REIT tenants by manually extracting WFH news and announcements from Google search of keywords associated with WFH and tenant names. For each REIT, a tenant WFH intensity metric is calculated as the number of tenants announcing WFH to the total number of in-sample tenants on a given day. The authors also use other proxies of WFH exposure, such as central business districts (CBD) exposure and exposure to retail properties and office properties.
Table 1. summarises the results. If a REIT increases its exposure to tenants whose employees work from home by 1%, the daily abnormal return drops by 1.76%. Furthermore, a REIT that owns more office properties than the average REIT has a 0.3% lower daily abnormal return, which equates to a drop in the company's value of 9% in a month. REITs that have more than the average number of properties located in CBDs also perform worse.
Milcheva and Xie (2022) show that the negative effect on returns is not alone explained by high CBD exposure alone but by a combination of CBD exposure and WFH intensity. Similarly, while REITs with high retail exposure do not perform differently from other REITs, having above-median retail exposure in combination with high CBD exposure leads to underperformance. This suggests that investors perceive that the retail properties located in the CBDs will mostly suffer from WFH and not any office or retail property or REIT per se.
The authors find that investors do not have significantly different responses depending on REIT’s domicile when anticipating the outcomes of WFH. Market expectations slowly absorb in valuations, as demonstrated by the limited net asset values (NAVs) response.