Market Liquidity and Commercial Real Estate Asset Prices: Transaction-Based Evidence tor Prime. Secondary and Regional Office Markets

The most commonly observed risk averse behavior in the commercial real estate market is loss aversion on the part of investors; i.e., investors are more sensitive to prospective losses than to prospective gains. This observation leads to the natural question : Does the market rationally anticipate investors' loss aversion? If not, then does loss aversion become stronger in a relatively illiquid market? The answer to these questions provides strategically important implications to institutional investors. We propose to explore the impact of loss aversion on the commercial real estate market by testing two competing hypotheses : (1) the rational market expectation hypothesis and (2) the liquidity spiral hypothesis. The rational market expectation hypothesis holds that the market rationally anticipates investors' behavioral loss aversion. As a result, the interaction between lagged market liquidity and loss aversion does not have an impact on the probability of property sales. On the other hand, the liquidity spiral hypothesis holds that the interaction between market liquidity and loss aversion has an impact on the probability of property sales due to the self-fulfilling feedback effect between loss aversion and market liquidity. In the context of REITs' property transactions, we find partial evidence for the liquidity spiral hypothesis : private market liquidity and stock market liquidity each has an additional impact on the sale probability of property.

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Banking Deregulation, Credit Constraints, and Asset Prices: Evidence from Commercial Real Estate

SSRN Electronic Journal ◽

10.2139/ssrn.2437089 ◽

2014 ◽

Cited By ~ 1

Author(s):

Yongqiang Chu

Keyword(s):

Real Estate ◽

Asset Prices ◽

Credit Constraints ◽

Commercial Real Estate ◽

Banking Deregulation

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Commonalities in Private Commercial Real Estate Market Liquidity and Price Index Returns

The Journal of Real Estate Finance and Economics ◽

10.1007/s11146-021-09839-z ◽

2021 ◽

Author(s):

Dorinth W. van Dijk ◽

Marc K. Francke

Keyword(s):

Real Estate ◽

Capital Markets ◽

Price Index ◽

Supply And Demand ◽

Real Estate Market ◽

Commercial Real Estate ◽

Market Liquidity ◽

Theoretical Simulation ◽

Operating Income ◽

The Difference

AbstractWe examine co-movements in private commercial real estate index returns and market liquidity in the US (apartment, office, retail) and for eighteen global cities, using data from Real Capital Analytics over the period 2005–2018. Our measure of market liquidity is based on the difference between supply and demand price indexes. We document for all analyzed markets much stronger commonalities in changes in market liquidity compared to commonalities in real price index returns. We further provide empirical evidence that space markets are less integrated than capital markets by analyzing co-movements in net-operating-income and cap rate spreads (over similar maturity bond yields). In a theoretical simulation model, we show that the strong integration of capital markets compared to space markets, is in fact the reason why market liquidity co-moves so strongly compared to returns. Our results are of interest for large private real estate investors such as pension funds and other institutional investors who are interested in spreading risk. Our findings imply that fully diversified price return benefits may be difficult to obtain, because market liquidity may dry up in all markets simultaneously, which makes portfolio re-balancing more difficult and costly.

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How does liquidity in the financial market affect the real estate market yields?

Journal of Property Investment and Finance ◽

10.1108/jpif-03-2018-0020 ◽

2019 ◽

Vol 37 (1) ◽

pp. 2-19 ◽

Cited By ~ 1

Author(s):

Kyung-Min Kim ◽

Geon Kim ◽

Sotiris Tsolacos

Keyword(s):

Real Estate ◽

Financial Markets ◽

Financial Market ◽

Commercial Real Estate ◽

Content Type ◽

Office Markets ◽

Office Market ◽

Excess Liquidity ◽

The Impact ◽

The Relationship

PurposeAfter the Global Financial Crisis in 2008, the impact of expanded liquidity in the financial market has drawn attention. The purpose of this paper is to examine the relationship between liquidity in financial markets and office markets across Asian countries. In particular, the research not only examines the effect of normal liquidity on real estate markets, but also the effects of excess liquidity are specifically highlighted.Design/methodology/approachThis paper uses panel estimation utilizing quarterly data from the first quarter of 2007 to the fourth quarter of 2015. Taking both time and location dimensions into account allows for a more precise estimate of the relationship between liquidity and office market’s yields.FindingsPer the empirical outcome, an increasing excess liquidity tends to decelerate the value of office yields in six major Asian office market centers due to the positive effect on commercial real estate value. This effect is also identified by comparing the difference between the level of fitted yields and actual yields.Practical implicationsThe results enhance the understanding of commercial real estate yield determinants. Furthermore, the results can be used to assess the impacts of liquidity on major office markets in Asia.Originality/valueThis paper attempts to uncover the impact of liquidity in financial markets on the office market yields. To better understand the relationship, the concept of excess liquidity is adopted and further exploration of each office market is conducted by comparing the fitted yields, which is computed considering the effects of excess liquidity on yield levels and actual yields.

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