Abstract
Nonlocal investors purchase and sell investment property in a distant metropolitan area. In this study, we identify capital value underperformance for nonlocal investors on both sides of the transaction, when they purchase and when they sell. The commercial real estate transactions data include a national sample of office property occurring in more than 100 U.S. markets. Using propensity-score matched sample to control for selection bias, we find that nonlocal investors overpay on the purchase by an estimated 13.8 % and sell at an estimated 7 % discount. These disadvantages relative to local investors expand with the geographic distance separating investor and asset. Nonlocal investors fundamentally overvalue similar assets sold to each other relative to assets transacted between locals, and are less patient as sellers. The positive bias in overpayment is directly tied to office rent differentials between the asset and investor markets.
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Notes
The number of observations used in the full sample does not include observations that are more than three observations beyond the sample mean for each of the dependent variables considered in the empirical analysis. An alternative approach to the propensity-score matching procedure uses both the trimmed and untrimmed full samples, resulting in empirical results that are qualitatively consistent in sign and significance with each of the results reported in this study.
Investor types are identified in the samples using CoStar definitions. The list of possible investor identities includes bank/finance, corporate, developer/owner – national, developer/owner – regional, educational, endowment, equity funds, government, individual, insurance, investment manager, listed funds, medical, nonprofit, other – private, other/unknown – institutional, pension fund, private REIT, public REIT, religious, REOC, sovereign wealth fund, tenants-in-common, and trust.
The list of possible sale conditions identified by CoStar includes 1031 exchange, assemblage, auction sale, bankruptcy sale, build-to-suit, building contamination issue, building in shell condition, business value added, condo conversion, court appointed sale, debt assumption, deed restriction, deferred maintenance, direct exchange, distress sale, double escrow, estate/probate sale, excess land, exercise of option, expansion, ground lease (leased fee simple), ground lease (leasehold), high vacancy property, historical site, land contract, lease option, note purchase, partial interest transfer, purchase by tenant, recapitalization, redevelopment project, REO sale, rolling option/takedown, sale leaseback, short sale, and soil contamination issue. An alternative approach is to include only transactions that occur under normal sale conditions, which does not have a material impact on the empirical results presented in this study.
For example, some variations to the model include the distance variable alone (without the nonlocal indicator and rent difference variables), the rent difference variable alone (without the nonlocal indicator and distance variables), the distance and nonlocal indicator variables together (without the rent difference variable), and the rent difference and nonlocal indicator variables together (without the distance variable).
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Liu, Y., Gallimore, P. & Wiley, J.A. Nonlocal Office Investors: Anchored by their Markets and Impaired by their Distance. J Real Estate Finan Econ 50, 129–149 (2015). https://doi.org/10.1007/s11146-013-9446-8
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DOI: https://doi.org/10.1007/s11146-013-9446-8