Commercial Real Estate Market Research Articles

Do Discount Rates Predict Returns and Risk for Private Equity? Evidence from Commercial Real Estate

This paper analyzes whether investors’ discount rates predict ex post returns and Jensen’s alpha in the private commercial real estate market. Tracking 4,430 properties in the U.S. that were worth 127 billion dollars at acquisition over the 1997 to 2014 period, I find that individual properties’ acquisition cap rates, which measure discount rates, have significant predicting power for ex post returns and Jensen’s alpha. The power is robust across property types and metro areas, is stronger in the short term, and persists when I control for sample selection, latent factors, heterogeneous factor loadings, and the pricing of non-systematic risk.

A Study on the Factors Affecting the Price of Commercial Land in the Changes of Macro-economic Variables - Focused on Seoul -

The purpose of the study is to analyze macroeconomic variables that affect the price of commericial land in Seoul and exhibit standards for rational decision-making using VECM(Vector Error Correction Model). In doing so, 5 macroeconomic variables(economic growth, interest rate, foreign exchange rate, consumer price and M2) are used. The results are as follows; First, it is found that the price of commercial land in Seoul is mainly influenced by foreign exchange rate, economic growth and changes of consumer price. Among them, the foreign exchange rate is most sensitive to the price of commercial land, So consider foreign investors who think exchange rate as important factor. Secondly, the price of commercial land is sensitively responsed by the changes of economic growth and consumer price. it is because that a lower economic growth leads to a decrease in the investment capacity for real property, and higher inflation resulting in an increase of the function of inflation hedge which has been recognized as a main feature of real property. Considering that it is expected that the potential economic growth of Kora would be declined and the population and birth rate is expected to be decreased, the commercial real estate market in Seoul will be continuously recessed unless the global economy is positively turned. Finally, the implication of the study are discussed along with the suggestion of the future direction.

Interdependence of Property Prices and Building Vacancy Rates in Residential and Commercial Real Estate Markets: Hong Kong and Singapore

In this research, we attempt to find the statistical interdependent relationship between vacancy rates and property prices in residential real estate market and commercial real estate market in Hong Kong and Singapore, the two cities sharing lots of characteristics in common. Vector autoregression (VAR) models and Granger causality tests are conducted to find out the causal relationship between residential housing or office building vacancy rate and the prices in respective markets. We also conduct vector error correction model if the variable pair is cointegrated at the same level.In the analysis of interdependence and VAR model estimation, prices and vacancy rates in Hong Kong residential real estate market and the commercial real estate markets in both cities do not significantly affect to each other. In Singapore residential market, lagged differenced vacancy rate negatively affects future differenced house price, the relation resulting from “fundamental driven effect.” For housing vacancy can be treated as excess supply in real estate market, the price will drop to decrease excess supply and to achieve long-term equilibrium when fundamental demand of residential house is less than supply, ceteris paribus. We also execute comprehensive market comparison of interdependence of property prices and vacancy rates and check the mutual effects of two variables in each type of real estate markets under the panel VAR dynamics. By vector error correction model (VECM), it is discovered that the long term relationship between vacancy rate and price exists in Singapore office building market. Moreover, the Singaporean office building differenced vacancy rate is affected by the deviations from the long term equilibrium relationship between price and vacancy rate. It is also found that, of the two types of property prices in Hong Kong, the long term relationship between residential house price and office building price exists.

Search Costs, Behavioral Biases, and Information Intermediary Effects

In many markets, buyers, sellers, and their agents have differential information about the quality of heterogeneous assets. We study negotiated transaction prices in the commercial real estate market, which is characterized by heterogeneous assets, illiquidity, and highly segmented local markets, all of which increase the importance of asymmetric information in negotiated pricing outcomes. Using 114,588 industrial, multi-family and office sale transactions that occurred during 1997–2011, we document that distant commercial real estate buyers pay, on average, premiums of 4 % to 15 % relative to local buyers, controlling for individual property characteristics as well as time fixed-effects. We also examine the extent to which the sources of these observed premiums are a product of higher search costs/information asymmetry problems associated with distance (search cost channel) or a result of reference-dependence preference/anchoring based on the price levels in the investors’ local market (behavioral biases channel). Our results suggest the observed price premiums are explained by distant investors who face higher search costs and are at an information disadvantage compared to investors located in closer proximity to the property. In contrast, anchoring plays a more muted role in explaining observed premiums. The use of an intermediary (broker) increases, on average, the acquisition prices of buyers and decreases the disposition prices of sellers by 3 % to 8 %. This result is consistent with the incentive real estate agents have to convince sellers to dispose of their properties too quickly and to convince buyers to search less and therefore pay higher prices.

Spatial Correlation in Expected Returns in Commercial Real Estate Markets and the Role of Core Markets

This study is based on survey data on investor expectations for 40 metropolitan statistical areas (MSAs) in the US over the period from 2003:Q2 to 2014:Q2. The paper has two main objectives. These are firstly to identify whether expected rates of return across different commercial real estate markets are positively spatially correlated and secondly to analyze the role of core markets like New York, Washington, DC, Los Angeles, San Francisco, and Chicago in the information-spreading process. All the tests conducted are conditional on the maintained hypothesis that expected returns across different markets are spatially uncorrelated. To carry out these tests, we regress a measure of excess return in each of the 40 markets on (contemporaneous) measures of expected returns in other markets, controlling for the interaction between (neighboring) markets. We find very large spatial interaction coefficients across different markets. Our basic estimates yield a spatial correlation coefficient of near one and statistically significant at standard levels. Chow tests allow rejection of the hypothesis that core markets like New York, Washington, DC, Los Angeles, San Francisco, and Chicago are no different than markets like Cleveland, Columbus, Orlando, Pittsburgh, Salt Lake City, St. Louis, and Tampa in explaining the covariances of the rates of return among different commercial real estate markets. Tests of structural change also imply that core markets currently play a more prominent role that in the past in the transfer of information from one market to another.

Credit Availability and Asset Pricing Dynamics in Illiquid Markets: Evidence from Commercial Real Estate Markets

This article examines credit frictions and asset pricing in public and private markets with varying liquidity. We find that a tightening in credit availability is negatively related to subsequent price movements in private and public commercial real estate markets. Assets trading in illiquid segments of these markets are also susceptible to a feedback effect whereby changes in asset prices predict subsequent changes in credit availability. Controlling for investor demand, our findings suggest credit constraints play an economically significant asset pricing role in markets that are both highly levered and relatively illiquid.

The Role of Real Estate Derivatives in Hedging Real Estate: An Empirical Analysis of the U.S. Commercial Market

Today, real estate today is used as an important investment vehicle owing to its many benefits, including diversification and ability to yield real returns. Real estate prices can be volatile in the short run, and therefore, investors need to hedge themselves to avoid negative returns. This problem is due to the systematic and unsystematic components of real estate risk. Systematic risk refers to risk that applies to all similar properties, while unsystematic risk refers to risk that applies only to the property that needs to be hedged. The systematic component of real estate risk can be mitigated by proper use of real estate derivatives, such as forwards, futures, options and swaps. These are instruments whose underlying asset is the index, which is composed of real estate in the region with a similar purpose as the property being hedged. This study examines some of the major benefits and difficulties of using real estate derivatives for hedging real estate, using data from the U.S. commercial real estate market, such as those from Ishares U.S. Real Estate Exchange Traded Fund, General Growth Properties Inc., Simon Property Group Inc., The Macerich Company, and Vornado Realty Trust. The daily data are from the period June 19, 2000 and August 24, 2015, with 3,820 pieces of information for each variable. The study aims to investigate the statistical integration in the U.S. commercial real estate market, using Johansen’s cointegration test. The research helps provide a better understanding of the real estate derivatives market and has important implications for academicians, practitioners, and policy makers.

THE CHANGING NATURE OF TRANSACTIONS ACTIVITY AND LIQUIDITY IN UK COMMERCIAL PROPERTY

This paper examines changing transactions activity and liquidity over thirty years in the UK. It reviews the multi-dimensional concept of liquidity analysis and demonstrates that it is not just a function of the time necessary to sell an asset, a typical real estate perspective. Instead liquidity is defined in terms of transactions activity. The paper then hypothesises that urban change and an increased information base has contributed to a more active management of real estate portfolios and increased liquidity. Superimposed on this long term trend it is also hypothesised that property cycles create rise and falls in liquidity. The empirical core quantifies the changing nature of liquidity and transactions activity over thirty years from 1981 based on the IPD database. It confirms the hypothesised substantial rise in liquidity but increasing variability in the level of transactions activity from one year to the next queries the cyclical liquidity hypothesis. This is supported by causality tests. Over the last two decades a short term opportunity driven real estate investment culture appears to have emerged stimulated by the increased churn of properties, partly the consequence of the pace of urban change. It has brought greater volatility to the commercial real estate market.

Исследование ценообразования на городском рынке коммерческой недвижимости с использованием эконометрических методов

Исследование ценообразования на городском рынке коммерческой недвижимости с использованием эконометрических методов

Strategy of Commercial Real Estate Market Development and Interests of the Region: Rostov Region

Strategy of Commercial Real Estate Market Development and Interests of the Region: Rostov Region

The effects of E-commerce on the demand for commercial real estate

Shopping online as an alternative to in-store shopping can make much of traditional retail less attractive. There exists an obvious relationship between e-commerce and the demand for commercial real estate that accommodates physical retail shops. Substantial evidence supports the idea that the demand for physical shops has been affected by the rapid development of e-commerce in China. In order to better understand the sustainability of the commercial real estate market in a context of rapidly developing e-commerce in China, this study seeks to clarify the relationship between e-commerce and the demand for commercial real estate. Methods of inductive and comparative analysis are adopted. The findings show that from 2009 to 2013, the slowing growth rate of commercial property sales and the accelerating vacancy rate of commercial properties are closely related to the dramatic growth of e-commerce. We also found that different forms of commercial properties–supermarkets, department stores and shopping centers–are differently affected by the rise of e-commerce. However, due to the respective advantages and disadvantages associated with online and offline shopping, physical stores will not be completely eclipsed by virtual retail shopping.

Environmental scanning and futures wheels as tools to analyze the possible future themes of the commercial real estate market

The commercial real estate market is closely linked to the surrounding society, as commercial buildings have several economic, environmental, political, social and cultural influences. Correspondingly, the surrounding society, its actors and the different forces of change appearing in the market environment also have their own influence on the real estate market environment and its future development. However, this connection may be left without the attention it is entitled to and there is a danger that far-reaching decisions concerning commercial real estates will be made without sufficient analysis over possible future development. This paper investigates how the forces of change appearing in the present real estate market environment may affect future commercial real estates and their market environment. The forces of change are identified with an information collection method called environmental scanning known from future studies. After that the possible future influences of the identified forces of change are organized and analyzed with another future studies method called futures wheels. Finally, a holistic synthesis over the mutual future themes of the commercial real estate market is presented: (1) real estate themes: comfort, image, distinctive spaces and elements, technicality, safety and geographical location and transportation connectivity (2) market themes: interaction, demand for services, segregation and need for special knowledge and expertise (3) ideological themes: quality and redefinition of attractiveness, integration of space types, diversified demand and versatility of commercial real estate and owner-occupancy vs. tenancy. The database utilized in the environmental scanning and future wheel processes consists of 400 literary sources and 170 person sources presenting the views of different real estate market actors. Acknowledging the identified future themes is essential when preparing for future development. By being aware, it is possible to carefully study different development paths, their probability, essential factors and above all, the actors’ own possibilities to affect future development.

Commercial Real Estate Rental Index: A Dynamic Panel Data Model Estimation

Using the actual quarterly rental income generated in the years between 2001 and 2010 by over 9,000 NCREIF commercial properties, we construct a commercial real estate rental index and estimate the time series properties (e.g., mean‐reversion speed and volatility) of market‐wide rental growth using a dynamic panel data model. The dynamic panel data model has several advantages over a standard hedonic regression. In addition, we incorporate age effects into our panel data model, and by doing so we correct the age bias in the repeated sales method and in the simple average method. Our estimates show that rental growth is cyclical but it generally lags behind broader economic growth. Surprisingly, the long‐term average rental growth is significantly lower than what is usually perceived, and the volatility of rental growth can be significantly under estimated when the conventional methods are adopted. We also find significant cross‐property type and cross‐region variations in the rental adjustment process. In contrast to the existing literature, we find a strong negative relation between rental growth and cap rate, and that this relation is significantly stronger than that between NOI growth and cap rate. Finally, we establish an empirical relation between price return and rental growth in the commercial real estate market.

Market maturity: China commercial real estate market

Purpose– The purpose of this paper is to explore the evolutionary path to market maturity that China property market has taken over the last few decades. The focus is on the commercial real estate markets in Beijing and Shanghai. It will help international investors understand the market environment, risk and market activity process.Design/methodology/approach– In this research, the authors apply the market maturity framework and its key determinants based on previous work undertaken by Keogh and D’Arcy (1994) and Chinet al.(2006) for the analysis of Chinese commercial property market. Particular focus is on Beijing and Shanghai. The questionnaire is designed to obtain fair and objective views from international property consultancy firms active in Beijing and Shanghai markets. There are not many of these international property consultancies. The reason why this type of business was selected was to insure that the business had an understanding of China’s place in the global commercial real estate market as this market matures from its emerging market status.Findings– The findings reveal that the respondents felt the commercial property markets in Shanghai and Beijing were now moderately mature. However, issues such as poorer level of standard market information, development instability, low transparency of the legal system, high taxes and high government invention still existed in China’s commercial property market, therefore hindering its progress towards greater market maturity.Research limitations/implications– The small same size of the survey is the major limitation of the research.Practical implications– International investors and analysts can benefit from the research findings through a better understanding of the behaviour and trends in this unique market which will be reflected in their decision-making process.Originality/value– An explorative approach was used due to the lack of data to examine the perception of China’s commercial property market’s evolution and maturity. The findings can then be placed in the context of other Southeast Asian cities. The evolutionary process of China’s property market is rarely examined in previous studies of China property market due to the lack of data and transparency.

Assessing the accuracy and dispersion of real estate investment forecasts

Existing empirical evidence has frequently observed that professional forecasters are conservative and display herding behaviour. Whilst a large number of papers have considered equities as well as macroeconomic series, few have considered the accuracy of forecasts in alternative asset classes such as real estate. We consider the accuracy of forecasts for the UK commercial real estate market over the period 1999–2011. The results illustrate that forecasters display a tendency to under-estimate growth rates during strong market conditions and over-estimate when the market is performing poorly. This conservatism not only results in smoothed estimates but also implies that forecasters display herding behaviour. There is also a marked difference in the relative accuracy of capital and total returns versus rental figures. Whilst rental growth forecasts are relatively accurate, considerable inaccuracy is observed with respect to capital value and total returns.

Determinants of loan losses of Indian Banks: a panel study

Purpose– The purpose of this paper is to examine the factors that influence the variability of loan losses (termed as non-performing advances or NPA in India) of Indian banks in the public sector during the period of five years from 2001 to 2005.Design/methodology/approach– The analysis is based on a panel approach, which considers both spatial and time dimensions of observations. Panel regression was used to explore the impact of different bank-specific factors on NPAs of 27 public sector banks (PSBs). Standard tests were used to find out suitability of different models of panel data analysis. Eight bank-specific factors were identified for analysis on the basis of review of extant literature.Findings– Certain bank-specific factors, in particular, net interest margin and capital adequacy ratio exhibit negative and significant impact on gross non-performing advances (GNPA) ratio of Indian PSBs. The results also suggest that relative quantum of sensitive sector (SEN) (comprised of commercial real estate, commodity and capital market) advances has a positive relationship with NPA ratio, and such a relationship is statistically significant.Research limitations/implications– The sample is restricted to India and may not be reflective of other countries. The study considers bank-level factors, and there are some macro factors (e.g. gross domestic product, interest rate and inflation rate) which could have explained the variability of GNPA ratio.Practical implications– Provisioning against loan losses is a major issue for stability of the banking system. Identification of appropriate causes of variability of such loan losses is important for managing credit portfolio of a bank. A positive and significant relationship between SEN advances and NPA calls for a more cautionary approach toward lending to those sectors.Originality/value– This paper is believed to be the first attempt to empirically examine the role of bank-specific factors. This study attempts to enrich empirical research in the field and provides an insight into the role of various bank-specific factors on loan losses in the context of Indian PSBs. The study provides contrary evidence regarding the role of priority sector advances on a GNPA ratio.

Analyzing Commercial Real Estate Market and Property Data: Techniques for the Classroom Using CoStar Information Services

CoStar Group is the largest research organization serving commercial real estate. Its database contains information on commercial properties, tenants and transactions. This paper presents examples of common methods for analyzing real estate markets that can be done by students using the CoStar database. The goal is to highlight how students can utilize data in real estate decision-making. We use examples that feature increasing levels of complexity. Some of the results are interesting findings, in and of themselves, including the differential performance of building owners/operators. We find that some owners/operators consistently underperform the market while others consistently outperform the market.

Office Rent Premiums with Respect to Light Rail Transit Stations

It seems an article of faith that because ridership catchment receives the largest share of riders within the first 0.5 mi (0.80 km), the design of transit-oriented development should be limited to 0.5 mi (0.80 km). But design of transit-oriented development requires another consideration: how the commercial real estate market responds. Unfortunately, much of the research into the commercial real estate value or rent premiums associated with transit station proximity is designed to reinforce the 0.5-mi (0.80 km) presumption. This paper reviews the literature and implications of ridership studies and research into commercial value and rent premiums with respect to distance from a transit station. The paper then reports research into transit station–related office rent premiums in the Dallas, Texas, metropolitan area. To the authors' knowledge, this study is the largest of its type undertaken on this question. Among the findings are that the premium extends 1.85 mi (2.98 km) from transit stations, with 25% of the premium—not a trivial amount— existing to 0.93 mi (1.50 km), with higher shares closer to the stations. The paper offers a reconsideration of both worker-based ridership and research on commercial real estate premiums to suggest that planning areas for transit-oriented development may extend beyond 0.5 mi (0.80 km), perhaps to 1 mi (1.61 km).

The key success factors of investing in shopping malls on the example of Polish commercial real estate market

The key success factors of investing in shopping malls on the example of Polish commercial real estate market

An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market

Institutional investors such as pension funds or insurance companies commonly invest in the unsecuritized and securitized real estate market. We investigate how institutional investor sentiment in the commercial real estate market affects institutional trading behavior in the REIT market and subsequently asset pricing. In particular, we test two alternative theories - flight to liquidity and style investing theory - to explain the sentiment-induced trading behavior of institutional investors in the REIT market for the pre-crisis (2002–2006), crisis (2007–2009) and post-crisis (2010–2012) period. We find that the applicability of either theory depends on economic conditions. In the pre-crisis period institutional investors switched capital in and out of REITs based on their sentiment in the private market (style investing). However, in the crisis period institutional investors switched capital from the illiquid private market to the more liquid REIT market (flight to liquidity). The flight to more liquid REITs continued into the post-crisis to a lesser extent and suggests that the financial crisis has changed institutional investment behavior. Our findings hold across different groups of REITs (e.g. high and low institutional ownership, S&P and non-S&P REITs) and property types. We also find that institutional real estate investor sentiment introduces a non-fundamental component into REIT pricing.