Asset Location, Timing Ability, and the Cross-Section of Commercial Real Estate Returns

53 Pages Posted: 5 Jan 2017 Last revised: 5 May 2018

See all articles by David C. Ling

David C. Ling

University of Florida - Warrington College of Business Administration

Andy Naranjo

University of Florida - Warrington College of Business Administration

Benjamin Scheick

Villanova University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2018

Abstract

This study examines the sensitivity of equity REIT returns to time-varying MSA allocations of REIT property portfolios. Using a large sample of individual commercial property holdings, we find significant cross-sectional and time variation in REIT geographic exposures and the ability of these exposures to explain the cross-section of REIT returns. Importantly, the pattern of MSA exposure effects changes quickly as local market information is incorporated into property values both across MSAs and over time. We further find evidence consistent with REIT managers being able, on average, to both identify MSAs that will outperform in the following year and overcome the costs and delays associated with increasing allocations to these MSAs. This ability to time allocation decisions is most prevalent in non-Gateway markets and varies significantly across MSAs and over time. Furthermore, financially flexible firms with a larger platform and experience owning and operating properties in multiple markets are better positioned to quickly act on investment opportunities they identify in major MSAs. In contrast, the ability to time market exit is more highly correlated with a firm’s perceived growth options and investment opportunities.

Keywords: real estate investment trusts, private commercial real estate, asset location, market timing, portfolio allocation, return performance

JEL Classification: G11, G12, G23, L25, R33

Suggested Citation

Ling, David Curtis and Naranjo, Andy and Scheick, Benjamin, Asset Location, Timing Ability, and the Cross-Section of Commercial Real Estate Returns (April 1, 2018). Available at SSRN: https://ssrn.com/abstract=2892870 or http://dx.doi.org/10.2139/ssrn.2892870

David Curtis Ling

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9307 (Phone)
352-392-0301 (Fax)

Andy Naranjo

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3781 (Phone)

Benjamin Scheick (Contact Author)

Villanova University - Department of Finance ( email )

United States

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