Institutional investors such as pension funds or insurance companies commonly invest in the unsecuritized and securitized real estate market. We investigate how institutional investor sentiment in the commercial real estate market affects institutional trading behavior in the REIT market and subsequently asset pricing. In particular, we test two alternative theoriesflight to liquidity and style investing theory -to explain the sentiment-induced trading behavior of institutional investors in the REIT market for the pre-crisis (2002-2006), crisis (2007-2009) and post-crisis (2010)(2011)(2012) period. We find that the applicability of either theory depends on economic conditions. In the pre-crisis period institutional investors switched capital in and out of REITs based on their sentiment in the private market (style investing). However, in the crisis period institutional investors switched capital from the illiquid private market to the more liquid REIT market (flight to liquidity). The flight to more liquid REITs continued into the post-crisis to a lesser extent and suggests that the financial crisis has changed institutional investment behavior. Our findings hold across different groups of REITs (e.g. high and low institutional ownership, S&P and non-S&P REITs) and property types. We also find that institutional real estate investor sentiment introduces a non-fundamental component into REIT pricing.

Commercial real estate investors differ in their sentiment due to factors such as market expertise, investment strategies and expectations about future market conditions. Focusing on the office market, we investigate whether investors with a multiasset investment focus such as pension funds or insurance companies rely on the sentiment of specialized real estate investors such as public REITs or private developers/owners as source of information in their investment decision-making. Using disaggregated sentiment measures and vector autoregression (VAR) we find evidence that changes in REIT and private real estate investor sentiment lead to changes in institutional investor sentiment in the suburban office and office REIT market. Our findings suggest that institutional investors rely on the sentiment of specialized real estate investors to make real estate investment decisions. Our study contributes to the existing literature on sentiment in commercial real estate markets by emphasizing the heterogeneity of investor sentiment and introducing a disaggregated sentiment measure. We also contribute to the institutional herding literature.

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The U.S. Green Building Council offers LEED certification for existing and new neighborhood developments that meet sustainable urban development standards. Features of sustainable urban development have been found to positively affect residential sales prices. We investigate whether the intangible labeling effects of LEED neighborhood certification add a premium to the sales prices of LEED and non‐LEED–certified condos. Using a quasi‐experiment, transaction data from Portland, Oregon, and a spatio‐temporal autoregressive (STAR) model, we find no evidence that the intangible labeling effects of LEED neighborhood certification directly or indirectly affect sales prices. Our results suggest that, contrary to LEED building certification, which we find adds a premium to condo sales prices, the LEED neighborhood label by itself fails to add value for condo buyers. Explanations for our findings include market acceptance, neighborhood delineation issues and the free rider problem as it relates to public goods.

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