Value and Momentum in Commercial Real Estate: A Market-Level Analysis

Abstract

Value and momentum strategies are widely recognized by capital market portfolio managers, although commercial real estate evidence is limited. In this article, Beracha and Downs apply these strategies in a market-level analysis using NCREIF data from 1986 through 2014. Conducting the analysis at the market-, or MSA-level, illustrates its usefulness to an institutional portfolio manager deciding which markets to target or, potentially, exit. Surprisingly, yet consistent with other asset classes, future returns on commercial real estate are positively correlated with the value effect, as measured by relative cap rate, and positively correlated with relative returnmomentum. Each strategy is robust to risk adjustment and persists over extended investment horizons. As suggested, value and momentum risk factors may benefit institutional investors in establishing benchmarks and monitoring performance.