Abstracts for Vol. 7, No. 1 of the Journal of Real Estate Portfolio Management

Homeownership and Investment in Real Estate Stocks

Jack Goodman

One viewpoint is that because homeowners already own real estate, they should diversify their investment portfolios by not making additional real estate investments. This paper provides an interpretation of owner-occupied housing as an investment and presents empirical results on the financial performances of houses and financial assets, including REITs, as individual investments and within a portfolio. The analysis shows that portfolios with 10% to 20% allocations to REITs historically have generally been able to achieve higher average annual returns, with no increase in volatility, compared to portfolios without REITs. This holds not only for renters, but also for homeowners with onethird or two-thirds of their wealth invested in their house. These findings are attributable to the low correlation between changes in house prices and the returns to real estate stocks, together with the historically competitive returns on real estate stocks relative to other financial assets.

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The 9/11/2001 Impact on Trophy and Tall Office Property

Norman G. Miller, Sergey Markosyan, Andrew Florance, Brad Stevenson, and
Hans Op’t Veld

This study focuses on the possible impact of the events of September 11, 2001 on tall and trophy office buildings for market behavior that could influence value. The findings indicated that there is little evidence of any significant departure from general market trends for tall buildings or most ‘‘trophy’’ property, yet for a small subset of truly famous buildings in both New York City and Chicago, such as the Empire State Building and the Sears Tower, there are significant rental and value losses. Sublease activity appears to work well as an indicator of future occupancy trends.
Using an additional survey aimed at property managers, there is little evidence of tenant flight away from tall buildings, or dense urban areas, yet property managers do expect significant design changes in the future as a result of September 11 and most have tightened security procedures.

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The Environment and Performance of Real Estate Investment Trusts

K. W. Chau, S. K. Wong, and Graeme Newell

This study analyzes the returns of publicly traded property companies using the style analysis approach. Our results show that the proportion of direct real estate has increased over time. This suggests that indirect and direct real estate are becoming closer substitutes for each other. Furthermore, the findings indicate that the performance of most property companies is not significantly different from the performance of the underlying implied portfolio before transaction
costs are taken into account. This implies that the performance of a property company is mainly attributable to its investment style characterized by the implied portfolio rather than management skills.

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Corporate-Owned Real Estate Represents a Substantial Investment Universe

Stephen E. Roulac

Corporate-owned real estate is a much more significant component of the real estate investment universe than is broadly recognized. In this article the results of recent research concerning the magnitude of the investment universe represented by corporate-owned real estate is presented, and the implications of the significance of corporate real estate for institutional investors are explored. Corporate-owned real estate incorporates significant types of properties that are not generally perceived as part of the mainstream real estate sector. While some 50% of corporate-owned real estate is specialized and therefore not appropriate for third-party investment by institutional investors, nearly 40% of the aggregate of corporate-owned real estate is core business real estate appropriate for institutional investors. The investable universe of $3.7 trillion of corporate-owned real estate represents a major source of property investments for institutional investors seeking involvement in the real estate market.

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An Investigation into the Credit Tenant Characteristics of Department of Defense Contractors

Daniel Rivetti, and Elaine Worzala

In the next few years, it is anticipated that the Department of Defense (DoD) and other government agencies will begin to outsource their civilian workforce to private contractors. The real estate and facility management sectors are prime areas for this privatization strategy. Current regulations favor DoD contractors that are tenants rather than owners. This will create a high credit lease opportunity for real estate investors. This study explores the impact of the privatization trend toward creating high quality office and industrial investments for the real estate marketplace. Given the government contract bias toward renting, a new group of credit tenants may appear. A hypothetical DoD tenant is used to explore the implications of the new regulations on the real estate market. This study posits that large office and industrial park complexes will be positively affected and properties in the right location to attract the new credit tenants that have been awarded privatization contracts will become more valuable, especially to the institutional investor.

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