This paper analyzes the linkages between the commercial real estate market and the economy. We maintain that a proper assessment of those linkages requires state of the art modeling techniques which treat economic variables endogenously and allow for a number of long-run relationships. We therefore use a long-run structural modeling approach, which incorporates equilibrium relationships that are predicted by economic theory, in an otherwise unrestricted VAR model. The application of this approach to Swiss data for the period 1974Q1–2012Q2 shows that four long-run equilibrium relations exist among inflation, long and short term interest rates, real M2, real GDP, real construction expenditures, real market rents, and capitalization rates. The analysis of the short-run dynamics additionally suggests that the linkages between the real estate and economic variables are bi-directional. Our results should provide for a better understanding of risks borne by investors as well as of the impacts of market interventions by policy makers.
