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An Integrated Approach to the Evaluation of Commercial Real Estate

Hedonic estimation techniques have been applied to real estate markets for more than twenty years, but the literature is dominated by analyses of the single-family residential market. This paper focuses upon hedonic analysis as applied to commercial real estate when information is known about complex characteristics and net operating income. The model presented incorporates traditional hedonic specifications and rate of return analysis. The empirical illustration focuses upon the apartment market in Houston, Texas, during 1980s. It is found that the apartment complex price function displays the same type of nonlinearities often found in the single-family market and that apartment market cap rates vary substantially over time and across project types. This suggests that analysts of commercial real estate should be wary of applying simple price per square foot rules or common cap rates across all property types and across all locations.

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Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 9 (1994)
Issue (Month): 2 ()
Pages: 151-168

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Handle: RePEc:jre:issued:v:9:n:2:1994:p:151-168
Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
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Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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  1. Palmquist, Raymond B, 1980. "Alternative Techniques for Developing Real Estate Price Indexes," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 442-48, August.
  2. G. Stacy Sirmans & C.F. Sirmans & John D. Benjamin, 1990. "Rental Concessions and Property Values," Journal of Real Estate Research, American Real Estate Society, vol. 5(1), pages 141-152.
  3. Ellickson, Bryan, 1981. "An alternative test of the hedonic theory of housing markets," Journal of Urban Economics, Elsevier, vol. 9(1), pages 56-79, January.
  4. Karl L. Guntermann & Stefan Norrbin, 1987. "Explaining the Variability of Apartment Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(4), pages 321-340.
  5. Crocker H. Liu & Terry V. Grissom & David J. Hartzell, 1990. "The Impact of Market Imperfections on Real Estate Returns and Optimal Investor Portfolios," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 453-478.
  6. Denton Marks, 1983. "The Effect of Rent Control on the Price of Rental Housing: An Hedonic Approach," Land Economics, University of Wisconsin Press, vol. 59(4), pages 81-94.
  7. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  8. Charles A. Smith & Mark J. Kroll, 1989. "Utility Theory and Rent Optimization: Utilizing Cluster Analysis to Segment Rental Markets," Journal of Real Estate Research, American Real Estate Society, vol. 4(1), pages 61-71.
  9. Allen C. Goodman & Masahiro Kawai, 1985. "Length-of-Residence Discounts and Rental Housing Demand: Theory and Evidence," Land Economics, University of Wisconsin Press, vol. 62(2), pages 93-105.
  10. Richard D. Evans, 1990. "A Transfer Function Analysis of Real Estate Capitalization Rates," Journal of Real Estate Research, American Real Estate Society, vol. 5(3), pages 371-380.
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