Commercial Real Estate Rental Index: A Dynamic Panel Data Model Estimation

42 Pages Posted: 23 Jan 2013

See all articles by Xudong An

Xudong An

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Jeffrey D. Fisher

Indiana University - Kelley School of Business - Department of Finance

Maggie Rong Hu

Chinese University of Hong Kong

Multiple version iconThere are 3 versions of this paper

Date Written: November 1, 2012

Abstract

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.

Suggested Citation

An, Xudong and Deng, Yongheng and Fisher, Jeffrey D. and Hu, Maggie Rong, Commercial Real Estate Rental Index: A Dynamic Panel Data Model Estimation (November 1, 2012). Available at SSRN: https://ssrn.com/abstract=2205058 or http://dx.doi.org/10.2139/ssrn.2205058

Xudong An (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

Jeffrey D. Fisher

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-7972 (Phone)
812-855-5875 (Fax)

Maggie Rong Hu

Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

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