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Rushing to Overpay: Modeling and Measuring the REIT Premium

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  • S. Akin
  • Val Lambson
  • Grant McQueen
  • Brennan Platt
  • Barrett Slade
  • Justin Wood

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. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • S. Akin & Val Lambson & Grant McQueen & Brennan Platt & Barrett Slade & Justin Wood, 2013. "Rushing to Overpay: Modeling and Measuring the REIT Premium," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 506-537, October.
    • Handle: RePEc:kap:jrefec:v:47:y:2013:i:3:p:506-537
    DOI: 10.1007/s11146-012-9372-1
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    More about this item

    Keywords

    Real Estate Investment Trusts (REITs); Equilibrium search; Hedonic price analysis; Repeat-sales analysis; Market efficiency; Deadlines; R33; R32; D83;
    All these keywords.

    JEL classification:

    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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