Preferences of Institutional Investors in Commercial Real Estate
46 Pages Posted: 31 Dec 2019
Date Written: December 10, 2019
In this paper we analyze preferences of institutional investors in the transaction process of commercial real estate by looking at the entire probability distribution of investors across property characteristics. By distinguishing between investors based on the size of their real estate portfolio, we estimate hazard models of property characteristics on the probability of a certain investor size quantile (ISQ) acquiring the real estate. We are able to show that the probability density function (pdf) of ISQs differs for different types of properties, different seller sizes and across states and over time. We document strong evidence for market segmentation by investor size. Controlling for year, metro and buyer fixed effects, there is a higher probability that a large (small) seller sells to a large (small) buyer. Moreover, larger and newer properties, with high net operating income (NOI) and better quality, and which are closer to Central Business Districts (CBDs) are bought by larger investors and vice versa. Large investors are more likely to buy the average property in certain US states as well. During the global financial crisis (GFC), the probability of the average property to be bought by large institutional investors declines. Our findings shed light on the transaction process in commercial real estate which understanding can improve market efficiency.
Keywords: hazard model, frailty, segmentation
JEL Classification: R30, C10, G11
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