Location Density, Systematic Risk, and Cap Rates: Evidence from REITs

38 Pages Posted: 11 Jun 2021 Last revised: 13 Jun 2021

See all articles by Gregg S. Fisher

Gregg S. Fisher

Quent Capital

Eva Steiner

Penn State Smeal College of Business

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Ashvin Viswanathan

People's United Advisors

Date Written: June 10, 2021

Abstract

A property's location is often considered to be the ultimate determinant of its investment performance. But how exactly does a property's location influence its risk and return? We focus on the effects of location density on the risk and return of commercial real estate investments. We do this by studying the geographical characteristics of the property portfolios of U.S. equity REITs. We show that REITs with property holdings in high-density locations experience higher rental growth and carry higher systematic risk than their otherwise comparable peers in low-density locations. Consistent with higher rental growth rates, high-density REITs also have lower implied cap rates. Our results suggest that location density is an important determinant of REIT performance outcomes, implying that geographical characteristics can drive investment risk and return across commercial real estate markets.

Keywords: Portfolio risk, real estate equity investment, property market fundamentals

JEL Classification: G11, R12, R33

Suggested Citation

Fisher, Gregg S. and Steiner, Eva Maria and Titman, Sheridan and Viswanathan, Ashvin, Location Density, Systematic Risk, and Cap Rates: Evidence from REITs (June 10, 2021). Available at SSRN: https://ssrn.com/abstract=3864236 or http://dx.doi.org/10.2139/ssrn.3864236

Gregg S. Fisher

Quent Capital ( email )

1120 Avenue of the Americas
4th Floor
NEW YORK, NY 10036
United States
212-796-0707 (Phone)

HOME PAGE: http://www.quentcapital.com

Eva Maria Steiner (Contact Author)

Penn State Smeal College of Business ( email )

University Park, PA 16802
United States

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ashvin Viswanathan

People's United Advisors

565 5th Avenue
New York, NY 10017
United States

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