Quick Study
Q&A with Crocker Liu, Arizona State University
by Brad Case
Quick Bio: Crocker Liu is
McCord chair and professor
of finance at the W.P. Carey
School of Business at Arizona State University, and
a co-editor of the academic
journal Real Estate Economics. He has authored or coauthored some 40 papers on
real estate finance and real
estate capital markets, many
focused on REITs.
Portfolio: Recently, you researched the market response
to the September 11 attacks to
study how long it took market
participants to revise expectations. You found that “insiders
updated their expectations more
accurately and faster than analysts, who in turn revised their
expectations more accurately
and faster than all other investors.” Does that suggest an in-
vestment strategy in the current
market turmoil?
Liu: Ordinarily, the answer
would be yes, since insiders are
more informed than outsiders
about their own firms and the
impact of an event with respect
to their firms. However, in the
current case, I suspect that those
who have lived through/expe-
rienced deep recessions in real
estate will fare better. Hopefully
with age comes wisdom. In the
case of the September 11 attack,
insiders knew about the shadow
space for their own inventory
of buildings. Here, the situation
also revolves around the avail-
ability of capital and the prob-
ability that their tenants will ask
for rent renegotiations.
Portfolio: You’ve found that
REITs are more likely to issue
equity when their stock prices
are high relative to net asset
value. REIT stock prices gener-
ally lead underlying property
values by six to 18 months, so
history suggests that REIT
stock prices are likely to start
increasing long before NAVs
hit bottom. Are we likely to be
entering a REIT security issu-
ance wave as this stock price
storm passes?
Liu: I think a better way to look
at the dynamics of the market-
place is to look at the relation-
ship between cap rates and
REIT stock prices, since NAVs
are only one component of the
equation. There should be a link
between income and values.
As long as cap rates continue
to rise, REIT security issuance
will be minimal at best. However, as cap rates start to decline,
you should see an increase in
REIT security issuance given
the demand-supply dynamics.
Portfolio: In one interesting
study you looked at the returns
of real estate limited partner-
ships (RELPs) and found that
“sponsors appear to exploit the
opportunities created by infor-
mational inefficiencies”—in
particular, that sponsors appear
to build a reputation by mak-
ing high-quality investments,
but then use subsequent money
from uninformed investors to
make low-quality investments.
Does that remain a danger with
the surge in RELPs in recent
years?
Liu: Yes, especially if there is
a lack of transparency and no
smart money flowing into these
investments. The majority of
investors of the public RELPs
were small investors who prob-
ably did not do the necessary
due diligence given the size of
their investment. This is why
you see a bifurcation in the
