Does Location Matter?

Abstract

It is axiomatic that all real estate is local. The question is whether very local submarkets within an MSA behave differently in terms of their fundamentals, and if so whether this behavior is priced appropriately so that total investor returns are approximately the same across locations. Long-term data on the market fundamentals of a large sample of Atlanta apartments combined with more recent data on sales transactions allow these authors to produce very accurate capitalization rates or yields. Market absorption, construction, and short-term vacancy vary across submarkets and are particularly volatile. Despite these differences, submarket rents move much more smoothly, although different areas are different in long-term rental growth, and the differences in performance are close to perfectly priced. In areas with higher rent growth and declining vacancy, yields are lower to the extent that theory would suggest.