While the U.S. housing market saw major ups and downs within the last ten years, the commercial real estate market has been able to avoid this fluctuation. The average prices remained steady with the quantity maintaining appropriate levels and few bankruptcies reported unlike the housing market. One would wonder why these two markers would not have been affected similarly. A recent research paper reveals that the “civilising influence” of real estate investment trusts, played a huge role in keeping this commercial market steady while the housing market was fluctuating wildly.
The research was done by Frank Packer, head of economics and financial markets for the Bank for International Settlements in Hong Kong; Timothy Riddiough, a real estate professor; and Jimmy Shek, a statistical analyst, and has had issues gaining more attention outside of REIT groups.
“REITs played a central role” in controlling the amount of the speculation which was the factor that led the to the downfall of the housing market. The study appeared in the Journal of Portfolio Management last year, but never received much attention.
The researchers believe that REITS help to create transparency in the real estate market, which give people investing the ability to see prices being overvalued or undervalued faster. For instance if a large project is announced in New York and REIT prices drop, it serves as a signal to other people in the industry that N.Y. is potentially being built up too much. The fact that REITs are long-term interests and benefit from being seen as reliable, helps the market as “management reputation and consistency over time are critical to continued affordable access to capital markets.”
The research says that this theory can be proven when looking at the overshoots and undershoots of construction in the U.S. office space market, as it remained more stable during periods where REITs maintained a larger share of the market.
The researches suggest that it is key to monitor the REITs closer during times when their market share is larger. They tried to focus in on the way the Reits’ market share impacted the situation by using two other things that impact office building construction, mostly the costs of buildings and the construction. They found the same impacts in different commercial real estate areas in the U.S. and even the same effects in Japan.
It cannot be said that the results showed the perfect way to examine REITs as a stabilising force, due to the fact that there are more unseen factors that could have affected the construction of office buildings. Furthermore, places that don’t have more developed REIT markets seemed to have stayed stable with or without REITs as a stabiliser. Nonetheless it presents interesting concepts to consider.
Surprisingly the research was done independently and received no financial assistance from the REIT industry. Once the results were published though, NAREIT publicly claimed that they liked the results in a statement made in REIT Magazine earlier this year, “The Riddiough, Packer, Shek study makes it clear that REITs provide real benefits for the broader commercial real estate industry, for investors and for our nation’s economy,” Ronald Havner Jr., NAREIT Chairman wrote.