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.