On demand: cross-country evidence from commercial real estate asset markets

Abstract

Using over 25 years of quarterly US and Japanese time series data, this paper examines the determinants of demand for an important class of durable, income producing real assets: commercial real estate. We specify a structural model of market equilibrium that considers direct effects of real investment on built asset price. Our empirical findings are consistent across countries and produce several new results. First, we find that real investment exerts a significant positive effect on asset price. Second, idiosyncratic risk is found to be strongly positively related to asset price, and to complement supply effects. Third, systematic risk is priced as expected, where the strength of the relation between asset price and systematic risk is found to be much higher than in previous studies of capital asset prices. Fourth, lagged values of price determinants are found to be important in real asset demand estimation. Alternative explanations for our findings are analyzed and discussed. Implications for asset pricing model specification and interpretation are also considered.