2000
Abstract:
Around the world, corporations are among the largest
owners of real estate assets; and in the United States,
they own more than $1 trillion of real estate or at least five
times the value held by publicly traded real estate companies.
Corporations not only own their production facilities, but also
frequently own their offices, warehouses, and retail outlets. A debate
has emerged as to whether it is harmful to these companies to commit
so much of their scarce capital to investments outside their core
competencies. Many suggest that companies with high capital costs
should not own relatively low-return buildings because this creates
negative arbitrage (e.g., see Linneman (1998)). However, capital
budgeting principles do not support this argument. In truth, the cost
of capital depends upon the use to which the capital is put. Thus, a
company with a highly cyclical product line and a relatively high capital
cost that owns its real estate has less risk exposure than an equivalent
firm that leases its space short term.
