Markets drive both yield and property type at CRE Investing

A new study conducted by and Professor Glenn Mueller of the University of Denver, Vaneesha Dutra of the University of Denver and Hany Guirguis of Manhattan College shows that location matters for investors seeking superior risk-adjusted returns . Better results were also achieved when investors rebalanced the markets more frequently.

Our research promotes the strategy of having individual portfolios for each property type in each city, allowing investors to make independent real estate investment decisions. Using market and industry returns from CoStar, the study identifies portfolio combinations with the highest risk-adjusted returns over the past 10 years. By looking at a cohesive picture created by real estate fundamental plot points, we analyzed supply, demand, occupancy, rents and yields to identify the best performing portfolios.

Building on existing data

Real estate has long been regarded as a buffer between investors and market volatility. Our research shows that direct real estate has historically traded more like bonds than stocks. Based on a Markowitz Efficient Frontier analysis, reasonable amounts of real estate historically would have provided the best risk-adjusted returns over various time periods. A 2019 Mueller & Mueller paper found that direct investment in real estate provided substantial benefits to a mixed asset portfolio. Researchers found that direct real estate had a low/negative correlation with stocks and bonds.

Knowledge needed to reduce risks

Investing in direct real estate can be a complex process with a very high barrier to entry for investors who lack the necessary tools to analyze markets as well as specific properties.

Investors also feel suffocated by the difficulty of trading properties that have required large initial investments of time and energy. Some overlook properties simply because they prefer a more negotiable vehicle that reflects the ease of loading and unloading offered by the stock market. In an ideal scenario, real estate investors can invest flexibly in offices, business premises, shops and homes in different cities.

While the concept of selecting a mix of investments that work synergistically to create a diversified, buffered portfolio may seem intuitive to investors today, the concept was first formulated by Dr. Harry Markowitz in the early 1950s. The Nobel laureate developed what is now called the Efficient Frontier method.

The metrics used to identify optimal investment choices change with trends. Yields for each property type within each property market are developed using the standard property yield building process. It is well known that demand for real estate in a market is often generated directly by basic economic industries that increase employment in that market. An example is the extreme expansion of the real estate market in Austin after the Texas city became a hub for technology companies. Austin’s trajectory to become the top location in the US for technology growth has been closely followed by an increase in rental and real estate demand. However, for a full analysis to be effective, investors must also consider the supply side of the market that can dampen the effects of this growth.

New real estate “key takeaways”

There’s a lot to be gained from our research because it’s the first of its kind to solve the “wild card” quotients that drive performance fluctuations in the nations’ top markets. This means we can optimize combinations of markets and property types to improve returns. Until now, it’s been difficult to change real estate investments annually to hedge risk because both the data simply wasn’t there and the investment tools didn’t exist to create real-time pivots.’s concept of separate urban and real estate portfolios represents an important step towards more dynamic real estate investing.’s method looks at property types in more than 50 markets to list the top performers using return performance and Sharpe Ratio analysis to identify stable returns based on the highest return per unit of risk. Here are four key points uncovered by’s research:

  1. You can increase returns with a focused real estate portfolio compared to a broadly diversified portfolio
  2. Markets must be rebalanced annually
  3. Allocations to property types must be reviewed annually

1. Choosing specific markets and property types is better than the “best” diversified REIT portfolio holding company.

If you invest 60 percent in stocks and 20 percent in bonds and the remaining 20 percent in real estate, the research shows that you’re better off investing in a targeted portfolio of specific markets and property types than in the most diversified REIT vehicles. This is because picking and choosing the right combination of markets and property types can have a significant impact on the Sharpe ratio of the overall portfolio.

As shown in the table above, you can increase returns from 9.48 percent to 12.69 percent by shifting real estate exposure from a broadly diversified portfolio to one with the optimal combination of both market weights and asset weights. the type of real estate. This also produces a 16 percent increase in the Sharpe ratio, indicating a reduction in the risk taken for each unit of return. For the period from March 2016 to February 2021, the optimal combination of markets and property types for the property portfolio is as follows:

2. Rebalancing the markets annually is better than holding on for 10 years.

Historically, investing in real estate, especially private real estate, has required a long-term buy-and-hold strategy. The asset class is generally not liquid enough to allow for regular rebalancing. However,’s research shows that rebalancing your portfolio annually with new allocations can yield significant improvements in your return profile over a typical buy-and-hold strategy. This would suggest that investing in a fixed portfolio with fixed market weights is not the best approach.

It is interesting to note that the optimal city combinations are not the same for every property type. As you can see in the tables below, the best market to invest in changes each year, as do the weightings. This applies to each individual property type.

Thus, for example, a strategy that targets the Sunbelt specifically may underperform when compared to a strategy that has specific target weights for different property types and different market combinations. While many groups can identify a list of top markets to invest in, they would be better served with different lists of markets for each property type, as the underlying factors that drive property returns are different for each property type.

3. Frequent rebalancing of property types improves the return profile.

Most groups will revisit their focus markets at least semi-regularly. However, it is much less common to revisit the target weighting for each property type. Our research has shown that rebalancing property type weights is also an important contributor to returns.

As you can see in the chart above, the appropriate allocation to each property type was dynamic and varied significantly from year to year. In addition to fluctuating market allocations, the ideal real estate portfolio, in order to achieve the best return profile, is dynamic in its allocations to apartments, industrial spaces and shops.

Thomas Foley is co-founder and CEO of