Household Income, Asset Location and Real Estate Value: Evidence from REITs

This article investigates how the market valuation of properties is related to the income growth of their asset locations. Based on the income tax data from the Internal Revenue Service (IRS) and the individual property information of U.S. equity real estate investment trusts (REITs) from 2000-2018, the article constructs an aggregated measure of household income growth for each REIT based on its asset locations in different metropolitan areas. The paper adopts an identification strategy that links household income shocks to real estate value. First, it shows that REITs with more properties located in high household income growth areas are associated with lower cap rates (higher market valuation). Then, it illustrates that household income growth positively affects REITs' firm value (measured as firm Q) and shareholder value (measured as market-to-book equity ratio). Moreover, the magnitude of the impact on real estate value from wages & salaries growth is much higher than from investment income growth. Further analysis provides evidence that REITs with more properties located in high income growth areas have, on average, higher occupancy rates and that the main results are robust when a different empirical approach is used. These findings suggest that local residents' income matters and should be considered in real estate portfolio construction and operation.