Interest Rates and Investment: Evidence from Commercial Real Estate


Interest rates in the U.S. have been at historical lows since the financial crisis in 2007 for almost a decade, which are partly meant to stimulate investments. However, a theory by Chetty (2007) suggests that, at low rates, decreasing the interest rate has little effect on investments due to the low cost of delaying investment. This paper estimates constant-quality commercial real estate pricing indices for U.S. metro areas and empirically studies how interest rates affect capital expenditures of more than 12,000 properties across time (from 1997 to 2014) and metros. The identification comes from different responses of property capital expenses across metros to the same interest rate. Results show that decreasing the interest rate has weaker stimulating effects on investments when rates are low and where property prices are high.

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  1. 1.

    See “Why are interest rates being kept at a low level?” at

  2. 2.

    Some examples of government action since the 2007 financial crisis include the Troubled Asset Relief Program of 2008, the American Recovery and Reinvestment Act of 2009, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

  3. 3.

    The NCREIF database consists of 33,338 properties and covers the period from the third quarter of 1977 to the last quarter of 2014. 17,629 properties have repeated cap rate observations and thus are used to construct cap rate indices. Another part of our analysis focusing on property capital expenditures uses 12,147 properties, of which we observe complete history of capital expenditures since the second quarter of 1997.

  4. 4.

    An example of constant-quality price indices for commercial real estate is the CoStar repeat-sales indices launched in August 2010.

  5. 5.

    Examples of NCREIF members are Blackrock, Citi group, TIAA, New York Life, Invesco, Heitman/JMB, and Cornerstone real estate advisers.

  6. 6.

    For each of the last four quarters of the sample period, we use the average NOI growth rate in the last four quarters to proxy for the growth rate in the coming year.

  7. 7.

    We thank the referee for pointing out that the 5-year treasury yield can be more reasonable for our sample given the duration of investments in the sample. We have replicate all analyses using the 5-year treasury yield and the results are robust.

  8. 8.

    We thank the referee for pointing this out.

  9. 9.

    We thank the referee for making this good point.


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We thank the Real Estate Research Institute (RERI) for a research grant and thank Raj Chetty, Jeff Fisher, Marc Louargand, David Watkins, Yuenleng Chou, and participants of the RERI 2011 conference and the AREUEA 2011 conference for numerous constructive comments. Liang Peng thanks the National Council of Real Estate Investment Fiduciaries (NCREIF) for providing the data. The authors take responsibility for any errors in this manuscript.

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Correspondence to Liang Peng.

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Peng, L., Thibodeau, T.G. Interest Rates and Investment: Evidence from Commercial Real Estate. J Real Estate Finan Econ 60, 554–586 (2020).

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  • Interest rate
  • Investment under uncertainty
  • Real options
  • Commercial real estate

JEL Classification

  • E22
  • E52