The Risk and Return of Commercial Real Estate

A Property Level Analysis

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

I compare the performance of the index-based time series approach and the cross-sectional approach in estimating factor loadings of nontraded assets, and show that the latter likely provides less biased and more efficient estimates. I then use the cross-sectional approach to estimate the loadings of privately owned commercial real estate on the Fama and French (1993) factors, the Pastor and Stambaugh (2003) liquidity factor, and two bond market factors, using a sample of 14,115 properties in the 1977–2012 period. I find statistically significant loadings, of which the signs seem consistent across property types, but the magnitude varies. Using the time series approach on the same data, I find insignificant loadings on virtually all factors. To investigate the sources of the weak results from the time series approach, I conduct a Monte Carlo simulation in which both approaches are correctly specified and indices can be estimated perfectly. Simulation results suggest that the cross-sectional approach provides more accurate estimates under reasonable market conditions.

Original languageEnglish (US)
Pages (from-to)555-583
Number of pages29
JournalReal Estate Economics
Volume44
Issue number3
DOIs
StatePublished - Sep 1 2016

Fingerprint

Commercial real estate
Risk and return
Factors
Assets
Market conditions
Factor loadings
Liquidity
Simulation
Market factors
Bond market
Monte Carlo simulation

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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abstract = "I compare the performance of the index-based time series approach and the cross-sectional approach in estimating factor loadings of nontraded assets, and show that the latter likely provides less biased and more efficient estimates. I then use the cross-sectional approach to estimate the loadings of privately owned commercial real estate on the Fama and French (1993) factors, the Pastor and Stambaugh (2003) liquidity factor, and two bond market factors, using a sample of 14,115 properties in the 1977–2012 period. I find statistically significant loadings, of which the signs seem consistent across property types, but the magnitude varies. Using the time series approach on the same data, I find insignificant loadings on virtually all factors. To investigate the sources of the weak results from the time series approach, I conduct a Monte Carlo simulation in which both approaches are correctly specified and indices can be estimated perfectly. Simulation results suggest that the cross-sectional approach provides more accurate estimates under reasonable market conditions.",
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The Risk and Return of Commercial Real Estate : A Property Level Analysis. / Peng, Liang.

In: Real Estate Economics, Vol. 44, No. 3, 01.09.2016, p. 555-583.

Research output: Contribution to journalArticle

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