Dry Powder vs. inside Information: The Role of out-of-Market CRE Investors

Owners of real assets often have informational advantages over other investors about asset- specific cash flows and local market conditions. When local property values suddenly decline, these investors may have to sell their assets quickly and have less access to credit due to the decline in the value of their collateral. This opens up the market to outside investors who lack the same informational advantages but have better access to capital. We find that, in times of stress, the volume of transactions in hard-hit markets falls, and entry from out-of-market buyers increases. Out-of-market buyers consistently pay less for properties, by about 20 basis points in terms of a cap rate, during both boom and bust markets, which is consistent with them reducing their bids when they are at an informational disadvantage. Out-of-market investors also tend to generate higher holding period returns for the previous owners, suggesting that they may still be overbidding for properties. Out-of-market buyers are less likely to purchase properties where they have a significant information disadvantage, such as troubled properties during a market decline.