Academic journal article The Journal of Real Estate Research

Brokerage Intermediation in the Commercial Property Market

Academic journal article The Journal of Real Estate Research

Brokerage Intermediation in the Commercial Property Market

Article excerpt

Abstract

This study is one of the first to investigate brokerage intermediation effects in the income-producing commercial property market. Employing multifamily sales data from the Atlanta and Phoenix markets under alternative brokerage specifications, little evidence to support the existence of systematic, differential transaction pricing outcomes due to the presence of brokers is found. The results suggest that the existence of brokerage intermediation effects is likely minimal in commercial markets that are relatively transparent, that have participants who are knowledgeable, and where value and price are typically determined based on a property's income-generating capacity.

A brokerage intermediation effect refers to the ability of brokers to bring about differing market outcomes measured by real estate transaction price or time on market. Subsequent to Yinger's (1981) initial work on real estate brokerage, researchers have expressed a wide range of opinions, hypotheses, and postulates on the potential impact of brokerage intermediation. To date, however, empirical evidence supporting the existence of brokerage intermediation effects can be described as both limited and sometimes contradictory. While there are a few studies from the residential brokerage literature supporting the existence of intermediation effects, consistent evidence of such effects has not been generated.

The present work separates itself from the existing literature by being the initial investigation focused on brokerage intermediation in the commercial property market.1 Apartment sales data with brokerage attributes from the Atlanta and Phoenix markets are used to test for the potential of a brokerage intermediationinduced pricing effect. The commercial property market differs from the residential property market because consumption is generally removed from the purchase decision and participants seek to maximize returns and optimize the investment decision. Commercial properties are purchased as investments generating income and appreciation returns. By investigating the presence of brokerage intermediation effects as measured by a pricing effect in the more transparent, return-oriented, income-producing property market where the privates party participants are typically knowledgeable, active owners and managers, the brokerage literature is extended and the existing debate on the potential effects associated with real estate brokerage activities is broadened.

The study findings imply little effect of brokerage intermediation on the sale prices of income-producing multifamily properties. The potential for brokerage intermediation to impact transaction price appears limited in markets where market participants are knowledgeable and are often known to one another. In markets characterized by relatively small numbers of typically informed, return-oriented participants and a small number of transactions, the market dynamics associated with brokerage differ from residential markets composed of substantially more unknown buyers, sellers, and brokers.2 The results suggest that a pricing-based brokerage intermediation effect is more likely to be evident in the residential property market where the duality of the investment and consumption decision is more likely to affect individual market participants than in the relatively transparent commercial property market. Sections addressing the extant brokerage intermediation literature, data choice, empirical analysis, and concluding remarks follow.

Brokerage Intermediation Literature and Hypothesis

Existing research on real estate brokerage intermediation is solely focused on the residential property market. A summary of the extant literature on the pricing effect associated with residential brokerage intermediation is provided in this section. Brokerage intermediation in the commercial property market is then discussed and the testable hypothesis is developed. The investigation broadens the application of brokerage intermediation effects to the income-producing property market. …

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