Abstract
This study investigates investor sentiment as an explanation for the variation in real estate market liquidity by accounting for liquidity regimes, different liquidity measures, and investor heterogeneity. Using Markov-switching regression and focusing on the U.S. office market, we find that investor sentiment has a significantly positive impact on the activity dimension of liquidity (turnover), which is larger in times of high market liquidity. On the other hand, sentiment has a significantly negative impact on the depth dimension of liquidity (price impact), which is larger in times of low market liquidity. The impact of sentiment on market liquidity also varies by investor type.
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