Academic journal article Real Estate Economics

An Analysis of the Determinants of Transaction Frequency of Institutional Commercial Real Estate Investment Property

Academic journal article Real Estate Economics

An Analysis of the Determinants of Transaction Frequency of Institutional Commercial Real Estate Investment Property

Article excerpt

This study examines the correlation of the frequency of the sale of investment-grade property with national, regional and local variables, including property-and owner-specific characteristics. More specifically, the study identifies the primary factors that "explain" intertemporal changes in transaction frequency in the underlying properties used to develop the National Council of Real Estate Investment Fiduciaries (NCREIF) index. Understanding these factors yields important information that can be used by firms when forming market expectations and developing investment strategies.

**********

Real estate market transaction activity is closely monitored by private sector investors, analysts and advisors, as well as by public sector participants. Significant increases or decreases in the level of prices or the frequency of transactions are often reported with some fanfare in the popular press. Understanding the factors affecting real estate price levels and their movements has been the focus of much research and analysis: however, relatively little attention has been given to examining transaction frequencies. In private real estate markets, changes in the frequency of transactions, as measured by changes in the number of properties sold from a stock of properties comparing one period to another (e.g., month to month, year to year), have been shown to be related to asset price movements. (1) Thus, transaction frequency is a key indicator of current conditions of the real estate market. In addition, it is widely viewed as an important "leading" indicator of the expected general conditions of local, regional and national economies. By monitoring transaction levels, market participants are better able to form market expectations, evaluate prices and develop investment strategies. This study examines the underlying factors that affect the probability of property sales occurring from period to period and therefore the transaction frequency. Identifying and evaluating the relative effects of these factors is fundamental to the analysis of the real estate market and its submarkets.

To date, research on the frequency of real estate transactions has focused primarily on the sale of existing residential properties and the demand for new residential construction (e.g., important works include Jaffee and Rosen 1979, Thom 1985, Stein 1995 and Rady and Ortalo-Magne 2001). (2) We know surprisingly little about the private market "transaction cycles" of investment-grade commercial property, despite its importance to the institutional investment community. Even less is known about the factors underlying these sales cycles and whether the relationship of "concurrent" or "leading indicators" of sales activity can be properly characterized.

This study identifies the relative correlation of national, regional and local variables, including owner- and property-specific variables, with the likelihood of investment-grade property sales activity. Specifically, we examine factors that "explain" intertemporal changes in sales volume in the underlying properties used to develop the National Council of Real Estate Investment Fiduciaries property index (NPI). In addition, the study explores whether the relative importance of these factors varies across property types. Our primary focus is on intertemporal sales variation, but the research question also is relevant to cross-sectional studies.

The study is organized as follows. In the next section we discuss the interaction of buyer and seller reservation prices resulting in intertemporal changes in liquidity and the conditions leading to procyclic behavior in the transaction cycle. An econometric model describing the primary factors affecting transaction probability is presented in the third section. The data are described and empirical results are reported in the last two sections.

Transaction Frequency, Market Liquidity and the Interaction of Reservation Prices

Though related, it is important to distinguish between the concepts of transaction frequency and market liquidity. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.