Market perceptions of distress and its impact on returns: evidence from the U.S. commercial real estate market

Ramya Rajajagadeesan Aroul, Sanjiv Sabherwal and Sergiy Saydometov

Journal of Property Research, 2024, vol. 41, issue 4, 299-323

Abstract: This paper examines the relationship between market participants’ sentiment regarding distress in the real estate market, captured through internet search queries, and the U.S. commercial real estate market. We use Google search frequency to construct a measure of market perception of distress, the Market Distress Perception Index (MDP Index), and determine the extent to which this index can help predict future private commercial real estate returns in the U.S. The results show that our pessimistic sentiment index predicts returns of commercial real estate up to three quarters in advance. These results hold at the national, regional, and state levels and are robust across various model specifications. The predictability of the sentiment index is especially pronounced during recessionary periods. We also analyse different property sectors and find that the inverse relationship between the MDP Index and future private commercial real estate returns persists across all sectors except the industrial sector. The relationship is strongest for the office sector.

Date: 2024
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DOI: 10.1080/09599916.2024.2379420

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