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Spatial Correlation in Expected Returns in Commercial Real Estate Markets and the Role of Core Markets

Author

Listed:
  • James D. Shilling

    (DePaul University)

  • C.F. Sirmans

    (Florida State University)

  • Barrett A. Slade

    (Brigham Young University)

Abstract

This study is based on survey data on investor expectations for 40 metropolitan statistical areas (MSAs) in the US over the period from 2003:Q2 to 2014:Q2. The paper has two main objectives. These are firstly to identify whether expected rates of return across different commercial real estate markets are positively spatially correlated and secondly to analyze the role of core markets like New York, Washington, DC, Los Angeles, San Francisco, and Chicago in the information-spreading process. All the tests conducted are conditional on the maintained hypothesis that expected returns across different markets are spatially uncorrelated. To carry out these tests, we regress a measure of excess return in each of the 40 markets on (contemporaneous) measures of expected returns in other markets, controlling for the interaction between (neighboring) markets. We find very large spatial interaction coefficients across different markets. Our basic estimates yield a spatial correlation coefficient of near one and statistically significant at standard levels. Chow tests allow rejection of the hypothesis that core markets like New York, Washington, DC, Los Angeles, San Francisco, and Chicago are no different than markets like Cleveland, Columbus, Orlando, Pittsburgh, Salt Lake City, St. Louis, and Tampa in explaining the covariances of the rates of return among different commercial real estate markets. Tests of structural change also imply that core markets currently play a more prominent role that in the past in the transfer of information from one market to another.

Suggested Citation

  • James D. Shilling & C.F. Sirmans & Barrett A. Slade, 2017. "Spatial Correlation in Expected Returns in Commercial Real Estate Markets and the Role of Core Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 54(3), pages 297-337, April.
    • Handle: RePEc:kap:jrefec:v:54:y:2017:i:3:d:10.1007_s11146-016-9581-0
    DOI: 10.1007/s11146-016-9581-0
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    Cited by:

    1. Füss, Roland & Ruf, Daniel, 2022. "Information precision and return co-movements in private commercial real estate markets," Journal of Banking & Finance, Elsevier, vol. 138(C).
    2. Zhu, Bing & van Dijk, Dorinth & Lizieri, Colin, 2024. "Price diffusion across international private commercial real estate markets," Journal of International Money and Finance, Elsevier, vol. 140(C).

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    More about this item

    Keywords

    Spatial correlation; Expected returns; Commercial real estate markets; Core markets;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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