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The Cross‐Sectional Dispersion of Commercial Real Estate Returns and Rent Growth: Time Variation and Economic Fluctuations

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  • Alberto Plazzi
  • Walter Torous
  • Rossen Valkanov

Abstract

We estimate the cross‐sectional dispersions of returns and growth in rents for commercial real estate using data on U.S. metropolitan areas over the sample period 1986 to 2002. The cross‐sectional dispersion of returns is a measure of the risk faced by commercial real estate investors. We document that, for apartments, offices, industrial and retail properties, the cross‐sectional dispersions are time varying. Interestingly, their time‐series fluctuations can be explained by macroeconomic variables such as the term and credit spreads, inflation and the short rate of interest. The cross‐sectional dispersions also exhibit an asymmetrically larger response to negative economics shocks, which may be attributable to credit channel effects impacting the availability of external debt financing to commercial real estate investments. Finally, we find a statistically reliable positive relation between commercial real estate returns and their cross‐sectional dispersion, suggesting that idiosyncratic fluctuations are priced in the commercial real estate market.

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  • Alberto Plazzi & Walter Torous & Rossen Valkanov, 2008. "The Cross‐Sectional Dispersion of Commercial Real Estate Returns and Rent Growth: Time Variation and Economic Fluctuations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(3), pages 403-439, September.
    • Handle: RePEc:bla:reesec:v:36:y:2008:i:3:p:403-439
    DOI: 10.1111/j.1540-6229.2008.00218.x
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    3. William G. Hardin & Xiaoquan Jiang & Zhonghua Wu, 2017. "Inflation Illusion, Expertise and Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 55(3), pages 345-369, October.
    4. Charles Ka Yui Leung & Jun Zhang, 2011. ""Fire Sales" in Housing Market: Is the House- Search Process Similar to a Theme Park Visit?," International Real Estate Review, Global Social Science Institute, vol. 14(3), pages 311-329.
    5. Tom Emmerling & Crocker Liu & Yildiray Yildirim, 2017. "The Hybrid Nature of Real Estate Trusts," ERES eres2017_370, European Real Estate Society (ERES).
    6. Rutger-Jan Lange & Coen N. Teulings, 2021. "The option value of vacant land: Don't build when demand for housing is booming," Tinbergen Institute Discussion Papers 21-022/IV, Tinbergen Institute.
    7. Jim Clayton & David Ling & Andy Naranjo, 2009. "Commercial Real Estate Valuation: Fundamentals Versus Investor Sentiment," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 5-37, January.
    8. Stephen Lee & Giacomo Morri, 2015. "Real estate fund active management," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 33(6), pages 494-516, September.
    9. Kevin C.H. Chiang & Xiaguan Jiang & Ming‐Long Lee, 2010. "REIT idiosyncratic risk," Journal of Property Research, Taylor & Francis Journals, vol. 26(4), pages 349-366, February.
    10. Alexander Schätz & Steffen Sebastian, 2009. "The links between property and the economy -- evidence from the British and German markets," Journal of Property Research, Taylor & Francis Journals, vol. 26(2), pages 171-191, September.
    11. Abdulmalik Fatimah Binta & Udoekanem Namnso Bassey, 2022. "Commercial Real Estate Rental Variation in Ilorin, Nigeria," Baltic Journal of Real Estate Economics and Construction Management, Sciendo, vol. 10(1), pages 140-155, January.
    12. Alexey Akimov & Simon Stevenson & Maxim Zagonov, 2015. "Public Real Estate and the Term Structure of Interest Rates: A Cross-Country Study," The Journal of Real Estate Finance and Economics, Springer, vol. 51(4), pages 503-540, November.
    13. Christian Rehring & Steffen Sebastian, 2011. "Dynamics of commercial real estate asset markets, return volatility and the investment horizon," Journal of Property Research, Taylor & Francis Journals, vol. 28(4), pages 291-315, June.
    14. Leung, Charles Ka Yui & Zhang, Jun, 2011. "“Fire Sales” in housing market: is the house-searching process similar to a theme park visit?," MPRA Paper 29127, University Library of Munich, Germany.
    15. Daniel Melser & Adrian D. Lee, 2014. "Estimating the Excess Returns to Housing at a Disaggregated Level: An Application to Sydney 2003–2011," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(3), pages 756-790, September.
    16. Yuming Li & Jing Yang, 2018. "House Price Dynamics and Excess Risk," International Real Estate Review, Global Social Science Institute, vol. 21(2), pages 251-274.

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