Rushing to Overpay: Modeling and Measuring the REIT Premium

Posted: 17 Sep 2013

See all articles by S. Akin

S. Akin

University of Miami

Val E. Lambson

Brigham Young University - Department of Economics

Grant Richard McQueen

Brigham Young University - Department of Business Management

Brennan C Platt

Brigham Young University - Department of Economics

Barrett A. Slade

Independent

Date Written: September 17, 2013

Abstract

We explore the questions of why Real Estate Investment Trusts (REITS) pay more for real estate than non-REIT buyers and by how much. First, we develop a search model where REITs optimally pay more for property because (1) they are willing, due to cost of capital advantages and, (2) they are occasionally rushed, due to external regulatory time constraints and internal incentives to deploy capital quickly. Second, using commercial real estate transactions, we find that the extant hedonic pricing models contain an unobserved explanatory variables bias leading to inflated estimates of the REIT premium. Third, using a repeat-sales methodology that controls for unobserved property characteristics, we derive more plausible estimates of the REIT premium. Consistent with our model, we also find the REIT-buyer premium depends on the size of the REIT advantage, the rush to deploy, and the relative presence of REITs in the market.

Keywords: Real Estate Investment Trusts (REITs), equilibrium search, hedonic price analysis, repeat-sales analysis, market efficiency, deadlines

JEL Classification: R33, R32, D83

Suggested Citation

Akin, S. and Lambson, Val Eugene and McQueen, Grant R. and Platt, Brennan C and Slade, Barrett A., Rushing to Overpay: Modeling and Measuring the REIT Premium (September 17, 2013). Journal of Real Estate Finance and Economics, Vol. 47, No. 3, 2013, Available at SSRN: https://ssrn.com/abstract=2327124

S. Akin

University of Miami ( email )

Coral Gables, FL 33124
United States

Val Eugene Lambson

Brigham Young University - Department of Economics ( email )

130 Faculty Office Bldg.
Provo, UT 84602-2363
United States
801-378-7765 (Phone)

Grant R. McQueen

Brigham Young University - Department of Business Management ( email )

TNRB 636
Provo, UT 84602
United States
801-422-3017 (Phone)

Brennan C Platt

Brigham Young University - Department of Economics ( email )

130 Faculty Office Bldg.
Provo, UT 84602-2363
United States
801-422-8904 (Phone)

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