Search Costs, Behavioral Biases, and Information Intermediary Effects

Buyers in commercial real estate markets often pay different prices for comparable properties. We document that distant commercial real estate buyers pay, on average, a premium relative to local buyers, controlling for individual property characteristics as well as time fixed-effects. We test the extent to which the sources of these observed premiums are a product of higher search costs/information asymmetry problems associated with distance (search cost channel) or a result of reference-dependence preference/anchoring based on the price levels in the investors’ home market (behavioral biases channel). Our results employing 114,588 industrial, multi-family and office sale transactions during 19972011 suggest the observed price premiums are explained by distant investors who face higher search costs and are at an information disadvantage compared to investors located in closer proximity to the property. In contrast, anchoring plays a more muted role in explaining the observed premiums. These results are robust to econometric techniques that control for potential unobserved property characteristics that are correlated with investor attributes. We also test the extent to which informational intermediaries affect the observed premiums and find that the use of a broker increases the acquisition prices of buyers and decreases the disposition prices of sellers. This result is consistent with the incentive real estate agents have to convince sellers to dispose of their properties too quickly and to convince buyers to search less and therefore pay higher prices.