Pricing Extreme Attributes in Commercial Real Estate: the Case of Hotel Transactions

We show that conventional hedonic models for commercial real estate prices ignore the utility investors derive from a building’s extreme attributes. Analyzing geo-enriched data on nearly 4,800 hotel transactions in the United States, we find that the relative positioning of an asset’s attributes – particularly at the extremes – has a significant impact on transaction prices. We also detect separating equilibria for extreme attributes across the premium and discount hotel segments. Extreme attributes “stand out” and are value enhancing in premium hotel segments. In contrast, extreme attributes are value diminishing in the discount hotel segment. The relative degree to which the asset’s attributes are extreme is important. Being a locally largest asset has a negative effect on price, however the negative effect is more than offset if the hotel is among the largest hotels nationally. The results suggest that locally extreme assets, unless also nationally extreme, are considered atypical and trade at a discount.