Risk and Returns of Commercial Real Estate: A Property Level Analysis
Posted: 1 Dec 2010
Date Written: November 29, 2010
Commercial real estate represents a significant fraction of total U.S. wealth, but its risk and returns at the property level are largely unknown. This paper utilizes detailed cash flow information of 2,845 commercial properties acquired for about $89 billion by institutional investors of NCREIF from 1981:3 to 2009:3 to analyze the returns and risk of commercial real estate. This paper finds that, first, commercial real estate has positive risk adjusted returns in the sample period. Second, both Fama-French factors and macroeconomic variables affect real estate returns, but the effects are time variant. Third, property type real estate indexes and MSA level return deviations from the indexes, once included in analyses, almost completely take away the explanatory power of Fama-French factors and macroeconomic variables, and provide incremental explanatory power. Finally, the risk in commercial real estate has a time invariant component, and is significantly lower when real estate investments earn higher returns.
JEL Classification: G1
Suggested Citation: Suggested Citation