The Price per Pound and Replacement Cost:
The Effects of Q on Office Investment

Abstract

Despite the reality that price versus replacement cost, or Tobin’s Q, is commonly used in making commercial real estate investment decisions, its efficacy has not been widely explored academically. Nordby and Taylor address this by examining the relationship between Q and office construction starts and pricing trends. By using CoStar property and land transaction sale price data and RSMeans construction cost data from 2000 to 2012, the authors are able to construct comprehensive national and market-level Q indices. The results indicate a strong relationship between Q and investment in office properties. The authors also find that this relationship differs across markets and is generally related to the level of barriers to construction present in these markets.