MSA Geographic Allocations, Property Selection, and Performance Attribution in Public and Private Real Estate Markets

Abstract

This paper examines the effects of geographic portfolio concentration on the return performance of U.S. public REITs versus private commercial real estate over the 1996-2013 time period. We document significant cross-sectional and temporal differences in the geographic concentration of property holdings across public and private real estate markets. Adjusting private market returns for differences in geographic concentrations with public markets, we find that core private market performance falls. This performance drop arises primarily from lower geographically adjusted retail performance. In contrast, geographically adjusted industrial and office property performance rises slightly while apartment performance remains relatively unchanged. Using return performance attribution analysis, we find that the geographic allocation effect constitutes only a small portion of the total return difference between public and private market returns, whereas individual property selection within geographic locations explains, in part, the documented outperformance of public versus private real estate market returns. This result also suggests that the decision to allocate to a geographic location is relatively less important than the manager‘s ability to select and manage properties within that location.