The Integration of Commercial Real Estate Markets and Stock Markets

TLDR

The study tests whether commercial real estate markets, both exchange‑traded and non‑exchange‑traded, are integrated with stock markets using multifactor asset pricing models. The authors employ multifactor asset pricing models to assess integration between commercial real estate and stock markets. Exchange‑traded real estate markets, including REITs, are integrated with exchange‑traded stock markets, a relationship that has strengthened in the 1990s, but appraisal‑based returns do not support integration, and real per capita consumption growth is consistently priced in both markets.

Abstract

This paper tests whether commercial real estate markets (both exchange‐traded and non‐exchange‐traded) are integrated with stock markets using multifactor asset pricing models. The results support the hypothesis that the market for exchange‐traded real estate companies, including REITs, is integrated with the market for exchange‐traded (non‐real‐estate) stocks. Moreover, the degree of integration has significantly increased during the 1990s. However, when appraisal‐based returns (adjusted for smoothing) are used to construct real estate portfolio returns, the results fail to support the integration hypothesis, although this may reflect the inability of these estimated private market returns to accurately proxy for commercial real estate returns. Interestingly, the growth rate in real per capita consumption is consistently priced in both commercial real estate markets and stock markets, whereas previous studies have found mixed evidence on the role of consumption in explaining ex ante stock returns.