Capitalization rates and transaction activity in international office markets: A global perspective

Abstract

Based on a sample of office markets in 33 cities across 16 countries for the period 2007-2015, this paper explores variations in commercial real estate transaction activity and asset pricing in international office markets. It is argued that there are complex interactions and feedback relationships between asset prices, transaction activity, market conditions and local institutional structures in real estate markets. Commercial real estate pricing is modelled using data on capitalization rates. The relationships found are consistent with previous research in terms of the importance of drivers such as government bond yields, yield spreads and real estate rents. Consistent with information network effects, it is also found that larger and more mature markets tend to have lower cap rates and, thus, higher asset prices. The results for transaction activity are less clear cut. Results from econometric analysis of turnover rates suggest that the same explanatory factors do not determine transaction activity to the same extent as cap rates. When purged of possible joint determinants, there is no evidence to support the view that cap rates affect market turnover rates or that turnover rates affect cap rates.

Estimating the value, ownership structure and turnover rate for investible commercial real estate from transaction datasets

“…They also noted that their New York result was anomalous when compared to other large US cities in their sample. In contrast, the estimate for London by Devaney et al (2019) of 10.1% average turnover for 2007 to 2015 based on value traded is more consistent with our figure, but subject to the same caveats around their approach to estimation.…”

“…Finally, the average office market turnover rates for New York and London can be compared to those found by in their study of US cities and Devaney et al (2019) in their international study. For New York MSA, However, their estimates for the stock value were based on combining floor area, rent per square foot and cap rate data and are likely to be less reliable than the estimates generated here.…”

“…However, values produced this way could be prone to measurement error and result in unusual figures for particular markets. While the estimates for US office markets in appear broadly plausible, the estimates of Devaney et al (2019) for international office markets included average annual turnover rates of over 20% of stock for Chicago, San Francisco and Seoul, which seem implausible.…”

“…Finally, the average office market turnover rates for New York and London can be compared to those found by in their study of US cities and Devaney et al (2019) in their international study. For New York MSA, reported average annual turnover rates of 4.1% based on value traded and 8.9% based on floorspace traded over 2002-2015.…”

“…In the absence of published estimates for the value of the office stock in different cities, and Devaney et al (2019) take estimates of floor space from real estate advisory firms and convert these into capital values using published market indicators for rents and capitalisation rates in those locations. This produced denominators against which office transaction volumes for the cities in their sample could be scaled.…”