The Global Determinants of Direct Office Real Estate Returns

We investigate the determinants of direct office real estate returns by analyzing rents, capital appraisals, and total returns. A recently compiled global database of major cities in Asia, Europe, and the United States provides a unique opportunity to give a macro-view on the effects of economic growth and supply and demand factors on nominal real estate returns. The global database provides quarterly observations from 1986 to 1999. To address the smoothness problem of appraisal-based price data and regulated rents, we employ the Generalized Method of Moments to estimate a dynamic panel-data model. The model allows us to combine the cross-sectional and time-series dimension in our quarterly data. We find that gross domestic product, inflation, unemployment, vacancy rate, and the available stock all have an effect on real estate returns.