List Price Information in the Negotiation of Commercial Real Estate Transactions: Is Silence Golden?

Abstract

This study examines the use (and non-use) of list price information in the process of marketing commercial real estate. As far as we are aware, this has not been addressed in the literature. While housing market research suggests that list prices can serve as a strong anchor and/or signal, list price information is included in less than one-third of the commercial property sales and is less likely to be included as part of the sellers’ offering information for larger multi-tenant properties. Given the potentially powerful effect of list prices (first offers) on outcomes, the non-use of list price information is a puzzle. We speculate that the limited use of list prices may be due to the sellers’ interests in both maintaining their informational advantage and not truncating higher than expected offers, especially during periods of economic growth or with more complex properties. Using a two-stage selection correction model, we find that office properties which provide list price information are, on average, associated with lower price outcomes (ceteris paribus) and that these outcomes vary by price cohort and economic condition. It is important to note, however, that while these findings identify a correlation, they do not necessarily imply causation (i.e., that the use of list prices ‘cause’ transaction prices to be lower). Our results support the notion that asymmetric information and signaling (i.e., the conveyance of property and/or seller information that may affect the likelihood of sale) play a dominant role in explaining the sellers’ strategic non-use of list price information in the commercial property market.