Economic Risk Factors and Commercial Real Estate Returns

J. OF REAL ESTATE FINANCE AND ECONOMICS, Vol. 14 No. 3

Posted: 14 Mar 1997

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

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Abstract

A great deal of research has focused on the linkages between stock and bond market returns and macroeconomic events such as fluctuations in interest rates, inflation rates and industrial production. Although the comovements of real estate and other asset prices suggests that these same systematic risk factors are likely to be priced in real estate markets, no study has formally addressed this issue. This study identifies the growth rate in real estate per capita consumption, the real T-bill rate, the term structure of interest rates, and unexpected inflation as fundamental drivers or "state variables" that systematically affect real estate returns. The finding of a consistently significant risk premium on consumption has important ramifications for the vast literature that has examined the (risk-adjusted) performance of real estate, for it suggests that prior findings of significant abnormal returns (either positive or negative) that have ignored consumption are potentially biased by an omitted variables problem. The results also have important implications for dynamic asset allocation strategies which involve the predictability of real estate returns using economic data.

JEL Classification: R39

Suggested Citation

Ling, David Curtis and Naranjo, Andy, Economic Risk Factors and Commercial Real Estate Returns. J. OF REAL ESTATE FINANCE AND ECONOMICS, Vol. 14 No. 3, Available at SSRN: https://ssrn.com/abstract=9235

David Curtis Ling (Contact Author)

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)

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