Risk and Returns of Commercial Real Estate: A Property Level Analysis

50 Pages Posted: 15 Aug 2010

See all articles by Liang Peng

Liang Peng

Smeal College of Business, The Pennsylvania State University

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2010

Abstract

This paper develops a novel empirical method that uses property level cash flow information to estimate the risk and return characteristics of private commercial real estate. Monte Carlo simulations suggest that this method is more accurate than the conventional index-based approach. Applying this method to 3,125 commercial properties (with estimated total value of $147 billion in 2009) invested by institutional investors between 1978 and 2009, this paper finds that the commercial real estate risk premium is positively related to the GDP growth rate and the change in the credit spread, and negatively related to the inflation rate, the stock market risk premium, and the change in the term spread. The sensitivities vary across property types and time. This paper also finds that the risk characteristics of commercial real estate vary across property types. While apartments have small positive loadings on all three Fama French factors, offices, industrial, and retail properties have insignificant loadings on the stock market risk premium, large positive loadings on SMB, and negative loadings on HML. The factor loadings also vary across time.

Keywords: commercial real estate, risk and returns, Monte Carlo simulations

JEL Classification: C51, E30, G11, G12

Suggested Citation

Peng, Liang, Risk and Returns of Commercial Real Estate: A Property Level Analysis (August 13, 2010). Available at SSRN: https://ssrn.com/abstract=1658265 or http://dx.doi.org/10.2139/ssrn.1658265

Liang Peng (Contact Author)

Smeal College of Business, The Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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