IMPACT OF 9/11 ON US REIT RETURNS: FUNDAMENTAL OR FINANCIAL?, THE

International Journal of Strategic Property Management, 2006 by Gheno, Andrea, Lee, Stephen L

Beyond the direct property losses of $20- $30 billion, 300 businesses were directly affected by the attack. Buildings that were destroyed, structurally damaged and non-structurally damaged buildings or buildings requiring expensive cleaning for asbestos dust, totalled between 27-29 million square feet, however, this comprised less than four percent (

However, the impact on the financial markets was swift and pronounced, stock prices tumbled, spreads between corporate and government bond yields, as well as spreads between emerging market and US bond index yields widened. Implied volatility as derived from traded options on stock market indices, government bond prices, short-term interest rates, exchange rates and commodities spiked upwards. Nonetheless, by the end of 2001, and not unlike during earlier wartime episodes, equity prices had bounced back vigorously, in many cases to well above their pre-9/11 levels, spreads generally narrowed and implied volatility declined significantly (Lenain et al, 2002). All of which suggests the impact on returns was short lived.

Baen (2003) argues that the terrorist attack added another dimension to property investment risk in the US and has serious implications for the future value and net operating income (NOI) to institutional, investment-grade real estate. Kelly (2001) supports this argument but suggests that the impact of 9/11 would be felt across America to a greater or lesser extent depending on the economic base of the MSAs. The author arguing that the impact of 9/11 will have a pronounced effect on the national economy and so the impact on real estate, in a given area, depends on the exposure of the MSA to economic cycles. For instance, the author predicted that tourism cities, such as Las Vegas and Orlando, and hightech localities, including Austin, San Jose, San Diego, will experience an immediate and steep contraction into 2002, with a sharp rebound in 2003. In contrast, some MSAs including Detroit, St. Louis, Kansas City, and Miami with significant import/export exposure or ties to manufacturing industries will face a sever and prolonged downturn. In particular, Kelly (2001) sees New York City facing a long lasting contraction, where the local economy does not recover to its 2001 level of employment until 2004. However, by the first quarter of 2002 Insignia/ESG reported that the New York real estate market was showing signs of recovery following the short recession of 2001.

Baen (2003) also suggests that the reduced demand for real estate due to 9/11 will be accelerated particularly in the high-rise CBD "trophy" office buildings that could be possible targets in the US or the world. Indeed, Grant (2002) predicted that landlords and/or tenants in "Trophy Property" high-rise buildings will be forced to pay much higher insurance costs (300 %) to stay in the central business districts. However, Miller et al (2003) find that there was no significant increase in vacancy rates in tall and trophy buildings across the major cities of the US although New York showed modest and negative effects on vacancy rates. The survey evidence by Miller et al (2003) indicating that the impact on tall and trophy buildings should show little lasting effects, although the truly famous buildings have suffered as a consequence of 9/11. Miller et al (2003) also found that sublease activity increased in famous buildings and since increases in sublease activity leads to increases in vacancy rates the authors argue that 9/11 had a negative effect on tall and trophy office markets. This is supported by Dermisi (2005) who finds that in Chicago which contains three of the four tallest buildings in the US (Sears Tower (first); Aon Center (third) and the John Hancock Center (fourth)) that although security measures were immediately heightened in the buildings after the terrorist attacks some tenants still vacated their office space as a direct consequence of the increased risk, with the terrorist attacks having a continuing and significant impact on vacancy and sublease vacancy rates in all three buildings. Additionally, even though gross rental rates have been kept stable, in an effort to increase demand and lower vacancy levels, the three buildings are still suffering. Dermisi (2005) concludes that "the psychological and economic effect of terrorist attacks on tenants of high-rise office buildings and their immediate areas is significant".