Human mobility and commercial real estate: Evidence from REIT operating performance

Abstract

The pandemic triggered a structural shift in the ways we work and live, and consequently altered human mobility. This study reveals how human mobility affects commercial real estate performance. We first use a machine learning model to determine the local factors that best predict human mobility. We next analyze the impact of predicted mobility on the operating performance of US Real Estate Investment Trusts (REITs), controlling for other pandemic-related factors. Our findings demonstrate that REITs with more exposure to mobility reduction report lower net operating income (NOI) during the pandemic, and importantly, the impact also extends to the postpandemic period. We find that the mobility reduction effect is more apparent in the office (through rental revenue) and retail (through operating expenses) sectors. We further demonstrate the sensitivity of adjusted funds from operations (AFFO) to predicted mobility has led to negative stock market reactions, more particularly for office REITs. Overall, our findings reveal that commercial real estate cash flows during the pandemic are more impacted by human mobility when compared to pandemic-specific factors such as COVID-19 cases and government interventions. Moreover, we extend our findings to the postpandemic period and show that human mobility has become a strong and persistent predictor of REIT performance.