How Different Is Real Estate? A Story of Factors

Abstract

How different is real estate from stocks and bonds? This paper sheds light on this question with new data and new methods. Analyzing 10,848 commercial properties from 1977 to 2017, we find that properties’ risk premiums contain systematic components that are orthogonal to a comprehensive list of stock and bond factors. We call these components real estate factors. We also find that properties in each region and property type have their own factors. The real estate factors have substantial incremental explanatory power for individual properties’ risk premiums, and properties’ attributes are related to their loadings of the real estate factors.

Keywords: Real estate, risk premium, factors

JEL Classification: G12, R33