Market Feedback and Valuation Judgment: Revisited

Appraisers receive feedback from a variety of sources such as other appraisers, clients and the real estate market. Previous studies find client feedback to introduce an upward bias into commercial and residential appraisal judgments. Hansz and Diaz (2001) find that the provision of transaction price (market) feedback for a previously valued property biases commercial appraisers upwardly in subsequent valuations. The authors provide market optimism, client feedback and a reduced conservatism bias as explanations for their findings. However, previous client and market feedback studies were conducted in upward-trending or booming real estate markets. The identified upward bias in valuation judgments may have been the result of positive real estate market conditions. This study investigates the impact of transaction price feedback on residential appraisal judgment in a changed appraisal task environment, characterized by a depressed housing market, market pessimism, conservative lenders and a changed residential appraisal industry. As Hansz and Diaz (2001) find an upward appraisal bias in an upward-trending market, I expect market feedback to introduce a downward bias into residential appraisal judgments in a depressed market. Compared to a “no feedback” control group, residential appraisers receiving the feedback that their previous value estimates were too high, compared to the realized transaction price, are expected to make significantly lower subsequent value judgments for an unrelated property. The “too low” feedback is not expected to have an impact on subsequent value judgments. I test the hypotheses with a controlled experiment using a pre-posttest design. The experimental design has one factor (transaction price feedback) fixed at three different levels (“too low”, “too high”, “no feedback”). A posttest-only validity control group is added to test for a potential testing bias in the pre-posttest design. This study uses residential expert appraisers, defined as active Oregon State certified residential appraisers, from the Portland metropolitan statistical area (MSA) as subjects. Experimental subjects are randomly selected from a list of all certified residential appraisers in the Portland MSA. Experimental subjects are randomly assigned to the control and treatment groups (10 subjects per group; N=40). Subjects in the treatment groups and pre-posttest “no feedback” control group are asked to value a lot of vacant residential land in the geographically unfamiliar Roswell, Georgia. After they provide their value estimates for this first valuation case, subjects in the treatment groups are given a note from a seller’s broker stating the transaction price for the previously valued property. Subjects in the “too high” feedback group receive a transaction price that is 15% below their estimates and subjects in the “too low” feedback group receive a transaction price that is 15% above their value estimates. The control group receives no feedback. All treatment and control groups are then given a second (unrelated) valuation case of vacant residential land in Newnan, Georgia and asked for their value estimate. The experiment is concluded with an exit questionnaire containing demographic and professional questions as well as manipulation checks. The experimental data are analyzed using the parametric independent samples t-test. The assumptions of normality and equal variances are not violated by the dataset. A one-way ANOVA and the non-parametric Mann-Whitney U test are used as robustness checks. All statistical tests conclude that neither the mean of the “too high” feedback group nor the mean of the “too low” feedback group are statistically different at the 5% level from the mean of the “no feedback” control group. Thus, no evidence is found that transaction price feedback biases residential appraisal judgments in a depressed market. The insignificant results are further analyzed to assess whether they are due to a non-reception of the treatment by subjects, low statistical power or a non-existing relationship: The explanation that subjects did not read the treatment note can be excluded. A power analysis reveals low statistical power and very small effect sizes for both treatments. An alternative explanation for the insignificant results is the absence of the hypothesized relationship. The main client group of experimental subjects is appraisal management companies, which due to legislation passed after 2007, work with appraisers on behalf of lenders. As a consequence, residential appraisers do not receive direct client feedback anymore (compared to Hansz and Diaz, 2001) and may not respond subconsciously to the “too high” feedback

Governmental Restrictions and Real Estate Investor Risk Perception

We investigate the impact of governmental restrictions on the short-term risk perception, as proxied by the going-in cap rate, of investors in regional and neighborhood shopping centers. We use the COVID-19 pandemic as a natural experiment and proxy for the length and severity of COVID-19 restrictions with the political affiliation of state governors. Using a sample of 40 metropolitan statistical areas (MSAs) across 27 states over the period of 2018 to 2021, we find that for states with Republican governors, which proxy for shorter and fewer COVID-19 restrictions, investors in regional malls required a lower going-in cap rate in the pandemic period than for states with Democratic governors. This effect does not exist for neighborhood shopping centers, whose tenants were not as affected by COVID-19 restrictions. Robustness checks suggest that our findings can be explained with mask mandates as one type of governmental restrictions, and that COVID-19 related restrictions do not impact the long-term risk perception of retail real estate investors. We furthermore find that the political attitudes of an MSA have an impact on investor risk perception

An investigation into sentiment-induced institutional trading behavior and asset pricing in the REIT market

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 inefficient commercial real estate market affects institutional trading behavior in the REIT market and subsequently asset pricing. In particular, we test two alternative theories - flight 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 (2010-2012) 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 liquid REITs continues 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

Governmental Restrictions and Real Estate Investor Risk Perception by

We investigate the impact of governmental restrictions on the short-term risk perception, as proxied by the going-in cap rate, of investors in regional and neighborhood shopping centers. We use the COVID-19 pandemic as a natural experiment and proxy for the length and severity of COVID-19 restrictions with the political affiliation of state governors. Using a sample of 40 metropolitan statistical areas (MSAs) across 27 states over the period of 2018 to 2021, we find that for states with Republican governors, which proxy for shorter and fewer COVID-19 restrictions, investors in regional malls required a lower going-in cap rate in the pandemic period than for states with Democratic governors. This effect does not exist for neighborhood shopping centers, whose tenants were not as affected by COVID-19 restrictions. Robustness checks suggest that our findings can be explained with mask mandates as one type of governmental restrictions, and that COVID-19 related restrictions do not impact the long-term risk perception of retail real estate investors. We furthermore find that the political attitudes of an MSA have an impact on investor risk perception

Understanding the Contribution of Curb Appeal to Retail Real Estate Values

The concept of curb appeal and its impact on property values has been largely neglected in the real estate literature. In the context of retail real estate, curb appeal represents the general attractiveness of a store viewed from the sidewalk or parking lot that is expected to affect consumer patronage decisions and consequently property values. We develop a measurement instrument for curb appeal and assess the validity of our measure using exploratory and confirmatory factor analysis. Our results suggest that curb appeal is multi-dimensional and consists of an atmospheric, architectural and authenticity dimension. Using transaction data and a spatial autoregressive model, we find that the atmospheric and architectural component have a positive impact on sales prices of restaurants. We also show that curb appeal dimensions are highly correlated with observable building features traditionally included in hedonic pricing models

Assessing Asset Pricing in the Commercial Real Estate Sector with Julia Freybote

What are the factors that influence commercial real estate pricing? Assistant Professor of Finance and Real Estate, Julia Freybote’s research considers various factors including emerging data streams, investor behaviors, and risk factors such as climate change to investigate asset pricing in the commercial real estate market. Click on the Download button to access the audio transcript

Sentiment-Induced Institutional Trading Behavior and Asset Pricing in Securitized Real Estate Markets

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 inefficient commercial real estate market affects institutional trading behavior in the REIT market and subsequently asset pricing. In particular, we test two alternative theories - flight 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 (2010-2012) 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 liquid REITs continues 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

The Evolution of Green Building Amenities: the Case of EV Charging Stations

The adoption of electric vehicles (EVs) by consumers has been increasing over the past years. It raises the need for charging stations in locations where EVs can be charged between uses. Office, apartment, and retail properties represent such locations. If tenants are willing to pay a premium for the ability to charge EVs between uses, a sales price premium is expected for buildings with this green building feature. This study uses commercial real estate transaction data to investigate whether the sales price premium for EV charging stations 1) varies across property types, locations, and building sizes, and 2) is distinct from the sales price premium for green building certifications (LEED or EnergyStar). Results suggest that the presence of EV charging stations adds a premium to the sales prices of 1) office, 2) suburban, and 3) medium-sized properties. The premium for EV charging stations exists independently from the premium for LEED or EnergyStar certification. However, charging stations in combination with green building certifications do not add an additional sales price premium. The findings of this study have implications for the decision making of commercial real estate investors and marketing strategy of EV infrastructure service providers

Tone in REIT Financial Statements and Institutional Investments

We investigate the response of institutional REIT investors to the abnormally (net) positive tone in REIT financial statements. For non-REIT firms, sophisticated investors have been found to respond negatively to an abnormally positive tone due to managerial incentives to take advantage of information asymmetries and use a positive tone to manipulate investor perception. However, institutional REIT investors have an informational advantage as they either directly invest in commercial real estate as part of their portfolio management strategy or, at a minimum, have access to commercial real estate market data. Thus, they are able to evaluate the abnormally positive tone in REIT financial statements against their perception of conditions in the commercial real estate and derivative REIT market. For a sample of US REITs over the period of 2001 to 2017, we find that the response of institutional investors to the abnormally positive tone in REIT financial statements is time-varying and non-linear, irrespective of whether we use variables in levels or changes. In particular, in periods of institutional REIT investor optimism (pessimism), institutional REIT investors respond positively (negatively) to an abnormally positive tone and behave as net buyers (net sellers)

Corporate Real Estate, Stock Market Valuation and the Reputational Effects of Eco-certification

Improving the energy efficiency of retail stores has become an important strategy for retailers. However, why do some retailers obtain Energy Star certification for their stores while others do not? We argue that retailers pursue this certification to capture reputational benefits of the Energy Star label when their stock market valuation is low. Using longitudinal data for US retailers (grocery and department stores) over the period of 2002 to 2014, we find that stock market valuation measured by Tobin’s Q explains (1) the likelihood of a retailer obtaining Energy Star certification and (2) the share of Energy Star-certified stores in a retailer’s portfolio. Operating expenses on the other hand do not appear to drive the decision to obtain Energy Star certification. Our results also suggest that the motivations of retailers to obtain LEED and Energy Star certification differ