Commercial Real Estate Rental Index: A Dynamic Panel Data Model Estimation
San Diego State University - Department of Finance
National University of Singapore (NUS) - Institute of Real Estate Studies; National University of Singapore
Jeffrey D. Fisher
Maggie Rong Hu
School of Banking and Finance, Australian School of Business
November 1, 2012
Based on the quarterly actual rental income of over 9,000 NCREIF commercial properties during 2001Q2-2010Q2, we construct a commercial real estate rental index using a dynamic panel data model. The rental index we construct captures the market-wide fluctuations in rental income, and our model estimates show that market-wide rent growth is mean-reverting and older properties tend to have consistently lower rent growth. We also provide a new measure of rental income risk, which is the volatility of the rental index we estimate from our model. In addition, our model provides additional tools for rent growth prediction. In contrast to the existing literature, we find a strong negative relation between cap rate and our rent growth estimate, consistent with theoretical predictions. Moreover, our rent growth estimate, together with mortgage interest rate and availability of financing, explains 85% of the cap rate variations during our study period.
Number of Pages in PDF File: 42working papers series
Date posted: January 23, 2013
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