Norges Bank

Staff Memo

Driving forces behind European commercial real estate prices prior to a sharp fall in prices

Marius Hagen and Frank Hansen
Staff Memo


What factors have driven commercial real estate (CRE) prices upwards prior to a sharp fall in prices? We study this question by identifying turning points in CRE for a dataset covering the prime office segment in 58 cities in Europe. CRE prices are decomposed into rents and CRE yields. Our results show that the increase in rents was the main driver behind the rise in CRE prices before peaks in the period 1980 to 2003. In the period 2004 to 2016, the decline in CRE yields was the main driver and was partly caused by a general downward trend in European CRE yields before the global financial crisis. A significant part of the decline is still left unexplained after controlling for factors such as the risk-free rate, the risk premium and city-specific effects. The reduction in CRE yields caused by the residual and the time dummies was likely driven by a change in omitted variables such as time variation in access to credit, capital requirements, the expected long-run rent growth rate and/or CRE specific risk premiums.

Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.

ISSN 1504-2596 (online)

Published 22 January 2018 10:00
Published 22 January 2018 10:00