Abstract: We estimate income growth expectations and risk premiums for illiquid real assets by exploiting information from long-term commercial leases. Using 20 years of U.S. lease data, we construct Spot Rent Indexes that capture instantaneous rental prices and recover physical expectations from historical rent growth and risk-neutral expectations from no-arbitrage conditions imposed by lease term structures. Our indexes exhibit greater time-series variation than existing indicators, more closely tracking macroeconomic fluctuations. Growth expectations embedded in long-term leases are significantly more rigid than realized rent growth, particularly for large leases in newer Class A properties. This rigidity implies that long-term leases function as revenue insurance for landlords through counter-cyclical value transfers from tenants during economic downturns. The wedge between physical and risk-neutral expectations reveals risk premiums that vary substantially across markets. Our methodology provides a framework for extracting forward-looking information from illiquid assets, offering new insights into asset pricing in markets where transaction data are sparse.
Real Estate Department