Nonlocal Office Investors: Anchored by their Markets and Impaired by their Distance

• Published in: The journal of real estate finance and economics Vol. 50; no. 1; pp. 129 - 149
• Main Authors: Liu, Yu, Gallimore, Paul, Wiley, Jonathan A.
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01.01.2015; Springer Nature B.V
• Subjects: Asset acquisitions; Asymmetric information; Asymmetry; Bias; Commercial real estate; Costs; Economic models; Economic statistics; Economic theory; Economics; Economics and Finance; Efficiency; Financial Services; Housing; Institutional investments; Investment; Investors; Literature reviews; Market efficiency; Prices; Property; Purchasing; Real estate; Real estate appraisal; Real estate market; Regional/Spatial Science; Sales; Studies; U.S.A; United States > US; Information asymmetry; Investor clienteles; Market efficiency
• ISSN: 0895-5638; 1573-045X
• DOI: 10.1007/s11146-013-9446-8

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.