The Commercial Real Estate Ecosystem

Ralph Koijen, AQR Capital Management Professor of Finance and Fama Faculty Fellow

We estimate an equilibrium model of the U.S. commercial real estate (CRE) market where investors with heterogenous valuations for property characteristics match with each other. Using detailed transaction-level data and both investors’ types and portfolio characteristics, we show that changes in investor composition over time are important to understand the price dynamics in CRE markets. We study the direct effect on the types of buildings such investors covet, as well as spillovers on different buildings of the same type and in the same geography, different property types, and different geographies. Our framework implies a hedonic pricing model for CRE prices where the coefficients change over time. Repeat-sales price indices fail to account for the changing composition of the investor pool present in the market at different points in time.