Flight to Quality? An Investigation of Changing Price Spreads in Commercial Real Estate Markets

Abstract

This paper uses sales transaction data in order to examine whether flight from risk phenomena took place in the US office market during the financial crisis of 2007-2009. The effect of the crisis on the pricing of asset quality attributes, mainly summarized by the class category of each building, is investigated. In addition, the paper examines how turnover levels were affected by the market downturn and whether there were significant variations between different real estate quality types. The results of the hedonic regression models suggest that the price spread between Class, A and B or C grew significantly during the downturn. We also find that property attributes such as size, height and age are priced significantly differently during upturns and downturns of the market.

Keywords: commercial real estate cycles, risk aversion, price spreads, pricing of property attributes

JEL Classification: E32, D4, D92, G11, R33