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Commercial Real Estate I

Paper Session

Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, 215
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Brent Ambrose, Pennsylvania State University

Revisiting Supply and Demand Indexes in Real Estate

Dorinth Van Dijk
University of Amsterdam
Alex van de Minne
Massachusetts Institute of Technology
David Geltner
Massachusetts Institute of Technology


"In this paper we disentangle reservation prices of buyers and sellers for commercial real estate at the city level. To do so, we further develop and extend the Fisher et al. (2003, 2007) methodology to a repeat sales indexing framework. This has the advantage that it takes care of all unobserved heterogeneity, which is an important consideration in commercial real estate. Furthermore,
it allows for the construction of supply and demand indexes without the need for many property characteristics or assessed values. A key innovation in our methodology, which also enables granular index production, is our use of a Bayesian, structural time series model for index estimation. By introducing these new methodological developments, we are able to estimate reliable, robust supply and demand indexes for all major metropolitan areas in the US. Here we focus on two very different urban markets: New York and Phoenix. Consistent with the notion of pro-cyclical liquidity, we find that buyers’ reservation prices move much more extremely and earlier than sellers’ reservation prices. Our results show that the demand indexes in both New York and Phoenix went down a full year earlier than the supply indexes during the crisis."

What's Wrong with Pittsburgh?

Andra Ghent
University of Wisconsin-Madison


Unlike many Over-the-Counter (OTC) markets, geography clearly demarcates Commercial Real Estate (CRE) markets making the interplay between investor composition and liquidity easier to observe. I first document that institutional CRE investors are concentrated in cities with higher CRE turnover. While higher turnover cities offer investors lower dividend yields than cities with lower turnover, the differences in dividend yields are quite modest compared with the cross-sectional differences in turnover. I then calibrate the search model of Vayanos and Wang (2007) to explain these facts. The model shows that heterogeneity in liquidity preferences makes some markets more liquid even when assets have identical cashflows.

Gravity, Counterparties and Foreign Investment

Cristian Badarinza
National University of Singapore
Chihiro Shimizu
Nihon University
Tarun Ramadorai
Imperial College London


We document a new "nationality bias" which impedes the efficient functioning of global markets for commercial real estate. In a large and comprehensive database of global commercial real estate transactions we find that buyers are significantly more likely to purchase properties from sellers with the same nationality. This preference to transact with the same nationality is quantitatively large and robust. We build an equilibrium search model of this market embedding a new matching friction, and structurally estimate it. When we evaluate the counterfactual impacts of eliminating the friction in our model, we find substantial gains in liquidity and prices in the market.

Developers, Wall Street, and the Taxmen

Jaime Luque
ESCP Europe
Marta Faias
New University of Lisbon


We build a general equilibrium model of commercial real estate (CRE)
development (aka, CRE asset creation), for an economy with several jurisdictions, and segmented
commercial good and equity markets. The CRE assets' capital structures and
cash flows, the prices of equity, debt, and commercial goods, and the
jurisdictions' property taxes and land use policies are all endogenous. We
show that an equilibrium exists for this economy. We also characterize the
equilibrium for a simplified economy where the capital structures of CRE
assets in different jurisdictions are interdependent. For this simplified
economy, we show how regional negative shocks to developers' funding debt capacity
result in leverage shifting toward other jurisdictions. We also show how
leverage increases in jurisdictions that pursue a high property tax fiscal policy. Finally, we
illustrate the \textquotedblleft race to the bottom\textquotedblright\
concept for a setting where jurisdictions compete to attract real estate
equity investments. For this last result, we highlight how global real estate markets can
influence local jurisdictions' fiscal policies.
Kelly Pace
Louisiana State University
Mike Eriksen
University of Cincinnati
Liang Peng
Pennsylvania State University
Andy Naranjo
University of Florida
JEL Classifications
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
  • G1 - General Financial Markets