Time on the market and commercial property prices
| Published date | 01 December 2003 |
| DOI | https://doi.org/10.1108/14635780310508630 |
| Date | 01 December 2003 |
| Pages | 473-494 |
| Author | Allison M. Orr,Neil Dunse,David Martin |
| Subject Matter | Property management & built environment |
Property prices
473
Journal of Property Investment &
Finance
Vol. 21 No. 6, 2003
pp. 473-494
#MCB UP Limited
1463-578X
DOI 10.1108/14635780310508630
Time on the market and
commercial property prices
Allison M. Orr
School of the Built Environment, Heriot-Watt University, Edinburgh, UK
Neil Dunse
Centre for Property Research, Department of Land Economy, University
of Aberdeen, UK, and
David Martin
Department of Land Economics, University of Paisley, UK
Keywords Property marketing, Property finance, Pricing policy, Rental value
Abstract Property markets are considered efficient when the market price of a transacted
property equates with its market worth. If this condition holds then identical properties should sell
or let for the same price. However, properties are heterogeneous, and information and
operational constraints exist. Consequently, events in the transaction process and factors like time
on the market, buyer and seller psychology and agent behaviour influence property prices,
whereas in a perfectly efficient market they would have no impact. This gives rise to similar units
selling for different prices. This paper examines the relationships between commercial property
prices and time on the market for property. Tests fail to find evidence of a direct relationship
between time on the market and transacted rents, time on the market and asking rents, and
asking rents with transacted rents. The reason for the insignificant results could be because
landlords would rather offer potential tenants non-price incentives such as rent-free periods, rent
break clauses, shorter leases or fitting-out costs to achieve a faster let than discount the agreed
contractual rent. A more detailed examination of the physical, location and market conditions
that determine the expected time on the market for a property to let is undertaken. Results suggest
that the state of the property market is an important influence on the time it takes to let a
property, and concurs with the evidence found in housing studies. With the support of our
empirical findings and evidence from the housing market, we conclude that including measures of
non-price incentives, landlords' motivation, tenants' characteristics, and search costs in our model
may explain the relationship more fully.
1. Introduction
The efficiency of the pricing mechanism in the commercial real estate market
has been the subject of extensive debate in the academic literature. The
existence of market failures is acknowledged, and the consensus view is that
they prevent the market operating as smoothly as a perfectly competitive
market. In particular, the imperfections associated with the supply adjustment
processes are regarded as key determinants in the volatility of prices.
Although, researchers acknowledge the importance of development lags, stock
immobility and durability in creating ``sticky'' supply adjustment, contention
still surrounds the extent to which operational and allocative inefficiencies are
generated by such imperfections. The studies that have been undertaken
concentrate on the development of new supply and how this feeds into the
occupation and investment markets. Yet, there has been very little analysis into
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the role of available stock in the determination of prices, or the efficiency of the
existing stock transaction process.
Evans (1995) argues that the exchange process within property markets is
relatively inefficient. Heterogeneity, imperfect knowledge, infrequent trading
and few buyers and sellers, make it difficult for actors to accurately predict
property values. The consequence of these imprecise valuations is that there is
no exact price for property, only a range of prices. The agreed sale price is
established within the price boundaries but the exact positioning depends on
the search process and the negotiation skills of the buyer and seller. Thus,
factors like time on the market, buyer and seller psychology and agent
behaviour influence property prices, whereas in an efficient market these
factors would have little impact and market prices would reflect the underlying
market worth of assets.
In his study, Evans (1995) links the determination of property prices with the
lengths of time those properties have been on the market. He hypothesises that
where properties have been standardised, they should display a positive
correlation between the prices obtained and the lengths of time that they have
been available on the market. He uses evidence from US housing market
studies to support this hypothesis, however makes no reference to similar work
applied to the commercial market.
In fact, there appear to have been no studies examining the transaction
process of commercial property to let and the relationship between the length of
time available on the market and the transacted rent. This paper seeks to
address the gap in our understanding. Its objective is to undertake a
preliminary examination of the relationships between asking and transacted
prices and duration on the commercial market. In the latter half of the paper we
concentrate specifically on identifying and examining factors that influence the
expected time it takes to let a property. The ultimate goal is to extend our
economic framework into a model of time on the market for retail, office and
industrial property that enables us to test the statistical significance of these
determinants.
The paper is structured as follows. In the next two sections, we provide a
brief overview of previous studies examining the transaction process of
complex goods. In particular, we investigate the application of time on the
market studies that were initially developed to examine the marketing time of
heterogeneous goods like labour and housing. This includes a review of the
existing residential literature and evaluation of the validity of applying
residential theory to provide a common theoretical framework for the
commercial property market. In the following section, we describe the
transaction data set used in the study. An empirical investigation is undertaken
in Section 5 to investigate the relationship between marketing duration,
transaction price and asking price. Then in the next section, we develop a
model to test the theoretical relationships between time on the market, the
characteristics of the property and market conditions, and discuss the results.
The conclusions and recommendations are discussed in the last section.
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