Which Sentiment Indicators Matter? Evidence from the European Commercial Real Estate Market

Measuring sentiment has been at the center of research for many years. While direct sentiment measures are assumed to be more suitable, we examine the construction and U.S. ability of indirect measures in the absence of direct measures in Europe. Driven by the unavailability of direct measures for most of the European countries in our study, we follow the general belief that each imperfect sentiment proxy—at least to a certain extent—contains some pure market sentiment. We present a set of four sentiment indicators relevant to real estate. In order to examine their relative importance, we apply them in a cap rate modeling framework with a sample of both developed and less developed European real estate markets. Forecast evaluations and goodness-of-fit measures reveal that models incorporating our sentiment measures improve upon the standard model specification of cap rates. We further find that sentiment has a stronger impact on economically weaker regions with less developed real estate markets in Europe, suggesting that investors may be relying on sentiment for price discovery in these markets. In addition, the use of a constructed search volume index suggests that markets with less publicly available information may experience a higher degree in searches. Our study highlights an application of online-search-based sentiment measure in those informationally inefficient and less developed markets.