Rushing to Overpay: Modeling and Measuring the REIT Premium

Keywords

Real Estate Investment Trusts (REITs), Equilibrium search, Hedonic price analysis, Repeat-sales analysis, Market efficiency, Deadlines

Abstract

We explore the questions of why Real Estate Investment Trusts (REITs) pay more for real estate than non-REIT buyers and by how much. First, we develop a search model where REITs optimally pay more for property because (1) they are willing, due to cost of capital advantages and, (2) they are occasionally rushed, due to external regulatory time constraints and internal incentives to deploy capital quickly. Second, using commercial real estate transactions, we find that the extant hedonic pricing models contain an unobserved explanatory variables bias leading to inflated estimates of the REIT premium. Third, using a repeat-sales methodology that controls for unobserved property characteristics, we derive more plausible estimates of the REIT premium. Consistent with our model, we also find the REIT-buyer premium depends on the size of the REIT advantage, the rush to deploy, and the relative presence of REITs in the market.

Original Publication Citation

“Rushing to Overpay: Modeling and Measuring the REIT Premium,” by S. Nuray Akin, Val Lambson, Grant McQueen, Brennan Platt, Barrett Slade, and Justin Wood. Journal of Real Estate Finance and Economics, 47:506-537, October 2013.

Document Type

Peer-Reviewed Article

Publication Date

2013-10

Permanent URL

http://hdl.lib.byu.edu/1877/8519

Publisher

Journal of Real Estate Finance and Economics

Language

English

College

Family, Home, and Social Sciences

Department

Economics

University Standing at Time of Publication

Full Professor

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