Do Different Price Points Exhibit Different Investment Risk and Return Commercial Real Estate

Posted: 28 Jan 2017

See all articles by David Geltner

David Geltner

Massachusetts Institute of Technology (MIT); MIT Center for Real Estate

Alex Van de Minne

Massachusetts Institute of Technology (MIT)

Date Written: January 26, 2017

Abstract

Conventional real estate price indices provide a single measure for the path of asset prices over time (controlling for the quality of the representative or average property). But it could be that properties have different price dynamics based on the price segment they are traded in. On the demand side, investors at different price points are differentiated by the amount of capital the investor has at their disposal and the type and source of financing. Smaller, private investors cluster at lower price points, while large institutions dominate the high price points. On the supply side, properties at different price points may serve different space markets with different types of tenants, and may reflect different supply elasticity and land/structure value ratios. This paper uses an unconventional approach, quantile regression, to estimate price indices for different price segments in commercial real estate. Our results show that there are indeed large differences in price dynamics for different price points. These differences are suggestive of a lack of integration in the property asset market, because we find apparent differences in the risk/return relationship. Lower price point properties exhibit less risk (in the form of volatility and cycle amplitude), but without evidence of lower total returns. Lower price point properties also show greater momentum and hence, predictability.

Keywords: commercial real estate, quantile regression, chained hedonic index, investment property, equilibrium asset pricing, price of risk

JEL Classification: R32, C01

Suggested Citation

Geltner, David and Van de Minne, Alex, Do Different Price Points Exhibit Different Investment Risk and Return Commercial Real Estate (January 26, 2017). https://doi.org/10.3905/jpm.2017.43.6.105. Available at SSRN: https://ssrn.com/abstract=2906955 or http://dx.doi.org/10.2139/ssrn.2906955

David Geltner

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

MIT Center for Real Estate ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

Alex Van de Minne (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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