Broker Use and the Price of Liquidity in Commercial Real Estate Investment: Analysis of Transaction Data for London and New York

Abstract

As is well established, commercial real estate is a highly specific asset: heterogeneous, indivisible and with less information transparency than most other commonly held investment assets. These attributes negatively affect the liquidity of real estate and encourage the use of intermediaries during asset acquisition and disposal. The cost of intermediation, or brokerage, is the single largest non-tax charge to the investor when acquiring assets. Despite this, there is comparatively little work dedicated to this aspect of the commercial real estate investment market in the extant literature. Furthermore, there are few attempts to explain the use of different brokerage models (with differing costs) in different markets.This study presents a detailed analysis of 9,338 real estate transactions in London and New York City from 2001 to 2011. Data are provided by Real Capital Analytics (RCA) and cover over $450 billion of investments in this period. The paper compares brokerage trends in the two cities and tests whether the decision to transact with broker representation varies with location, investor or asset characteristics. Results indicate greater use of brokerage in London, especially by purchasers, and this persists when data are disaggregated by sector, time or investor type, pointing to the role of local market culture and institutions in shaping brokerage models and transaction costs. Furthermore, within each city, the nature of the investors involved appears to be a more significant influence on broker use than the characteristics of the assets being traded.