Abstract
Market outcomes are contrasted for uninformed investors with and without broker representation to evaluate the information role, and for parties opposing the uninformed (with and without representation) to evaluate the bargaining role. The setting is a sample of 17,000 office building transactions in more than 100 US markets, and the identification strategy for uninformed investors is based on the nonlocal clientele effect. Nonlocal investors buy high and sell low, paying significant premiums in acquisitions and accepting discounted offers in divestitures. Employing a commercial broker is found to have virtually zero impact on this disparity. Moreover, when the opposite party has broker representation, the degree of overpayment by nonlocal buyers is even higher. These findings are at odds with the conventional notion that brokers possess a high degree of specialized market knowledge which can be used to offset informational disadvantages suffered by their clients.
Highlights
Real estate brokers are widely assumed to possess specialized market knowledge which can be commissioned to offset disadvantages faced by uninformed market participants
Support for the explanation based on information asymmetry is documented by Neo, Ong and Tu [4], who find that foreigners pay higher premiums for low-rise condominiums which are more heterogeneous and difficult to value than high-rise units
Prices paid by local buyers who have broker representation are compared to those in a matched sample of similar assets purchased by local buyers who were unrepresented during the transaction
Summary
Real estate brokers are widely assumed to possess specialized market knowledge which can be commissioned to offset disadvantages faced by uninformed market participants. Nonlocal investor clienteles persistently underperform in CRE markets: overpaying for purchases and selling assets at significant discounts to local players. Nonlocal investors are buyers or sellers whose address is located in a different geographic market than the investment property. Perhaps brokerage intermediation can resolve these issues if a CRE broker is able to provide their clients with specialized market information and bargaining expertise. Prices paid by local buyers with broker representation are compared to those paid by local buyers without representation—to identify baseline brokerage intermediation effects for informed buyers. Outcomes for nonlocal buyers who have broker representation are compared to outcomes for represented local buyers to determine whether the nonlocal clientele effect differs when brokers are involved. We provide background on the nonlocal clientele effect and brokerage intermediation in real estate markets. The fourth section discusses the empirical findings, and the final section provides concluding remarks
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