The Dynamics of Liquidity in Commercial Property Markets: Revisiting Supply and Demand Indexes in Real Estate

34 Pages Posted: 1 Feb 2018 Last revised: 20 May 2020

See all articles by Dorinth van Dijk

Dorinth van Dijk

De Nederlandsche Bank; Massachusetts Institute of Technology (MIT)

David Geltner

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

Alex Van de Minne

University of Connecticut - Department of Finance

Date Written: January 30, 2018

Abstract

A common definition of liquidity in real estate investment is the ability to sell property assets
quickly at full value, as reflected by transaction volume. The present paper makes methodological
and conceptual contributions in the study and understanding of liquidity. First, we extend
the Fisher et al. (2003, 2007) methodology for the separate tracking of changes in reservation
prices on the demand (potential buyers) and supply (potential sellers) sides of the asset market.
We show how to apply the methodology to a repeat sales indexing framework, allowing application
to typical commercial property transaction price datasets, which lack appraisal valuations
or complete data regarding property characteristics. We also use a Bayesian, structural time series
approach to estimate the indexes. These methodological enhancements enable much more
granular supply and demand index estimation, including at the metropolitan level. Second, we
propose a Liquidity Metric based on the indexes, and show that the normal liquidity dynamic
in commercial property asset markets is “pro-cyclical”, that is, price and trading volume tend
to move together, with demand tending to lead supply. But we also observe an “anomalous”
dynamic that occurs about 25 percent of the time, in which the Liquidity Metric declines while
consummated prices are still rising. This anomalous dynamic is often associated with the end of
a period of rapid growth in market values.

Keywords: Liquidity, Commercial real estate, Bayesian repeat sales price index, Equilibrium dynamics, Constant liquidity index

JEL Classification: R30, C11, C32, C41

Suggested Citation

van Dijk, Dorinth and Geltner, David and Van de Minne, Alex, The Dynamics of Liquidity in Commercial Property Markets: Revisiting Supply and Demand Indexes in Real Estate (January 30, 2018). De Nederlandsche Bank Working Paper No. 583, Available at SSRN: https://ssrn.com/abstract=3114073 or http://dx.doi.org/10.2139/ssrn.3114073

Dorinth Van Dijk (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Massachusetts Institute of Technology (MIT) ( email )

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

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

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
184
Abstract Views
899
rank
178,964
PlumX Metrics