Felipe Iachan, EPGE – FGV

Paper: Spatial Risk Premia in Residential Real Estate

Abstract: We examine price formation and spatial heterogeneity in residential real estate returns through a dynamic urban development model. Grounded in Urban Economics, the model introduces dynamics into rent formation and allows for heterogeneous risk exposure across locations. It generates simple pricing formulas that rationalize higher returns in lower-value properties through an operating leverage channel: locations with lower rents bear proportionally higher fixed costs, amplifying their exposure to aggregate shocks. Using NCREIF total return data on multifamily properties, we document spatial dispersion in returns across and within cities. Across cities, systematic risk exposure is priced in Fama-MacBeth regressions, with capitalization rates as the primary driver of return heterogeneity. Within metropolitan areas, excess returns increase by approximately 3 basis points per mile per quarter from the primary employment center, a gradient that survives controls for neighborhood demographics. Two further tests deliver restrictions consistent with operating leverage: the interaction of location-level leverage and the consumption-wealth ratio predicts future returns, and a calibration exercise.