What is real estate?

Neu Olden SOlden@bigcompany.com

The usual asset categories—office, warehouse, apartment, industrial, hotel—are blunt instruments. Some analysts address this criticism by creating property type-regional pairs. This is still too blunt. Slicing geography even finer, analysts look at property-MSA pairs. At this point, insufficient data become a problem. An alternative way to think about real estate it to focus on factors which drive risk premiums. Multi-tenanted properties, in particular, are bundles of factors. Investors seek risk premiums in exchange for exposure to these underlying factor risks. CAPM is an example of a single factor driving all asset returns. In practice, there are multiple factors. Why is this important? Investors seek diversification, and the wrong categories often lead to naïve diversification wherein the investor assumes unexamined risks.