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

Abstract

This study examines the sensitivity of equity REIT returns to the time-varying MSA allocations of REIT underlying 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 that REIT managers are 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. The ability to time entry into high performing markets is concentrated in well diversified REITs and those with large market capitalizations and high employee counts. 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.