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Markets Drive Returns as Much as Property Type in CRE Investing

New research by and its partners promotes the strategy of having individual portfolios for each property type within each city to allow investors to make independent real estate investment decisions.

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

Our research promotes the strategy of having individual portfolios for each property type within each city to allow investors to make independent real estate investment decisions. Using market and sector returns from CoStar, the research identifies the highest risk-adjusted return portfolio combinations over the last 10 years. Looking at a cohesive picture created by fundamental real estate plot points, we analyzed demand, supply, occupancy, rents and returns to identify the highest-performing portfolios.

Building on existing data

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

Knowledge needed to reduce risk

Investing in direct real estate can be a complex process with a very high barrier to entry for investors operating without the necessary tools for analyzing both markets and specific properties.

Investors also feel stifled 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 tradeable vehicle that mirrors the easy entry and offloading provided by the stock market. In an ideal scenario, property investors can invest flexibly in office, industrial, retail and residential portfolios located in different cities.

While the concept of selecting a mix of investments that synergize to create a diversified, buffered portfolio seems intuitive to investors today, the concept was first formulated by Dr. Harry Markowitz in the early 1950s. The Nobel Prize winner founded what is referred to today as the Efficient Frontier method.

The metrics used to identify optimal investment choices change with trends. Returns for each property type within each real estate market are developed using the standard return-building process for real estate. It is generally known that demand for real estate in a market is often generated directly from economic base industries that expand employment in that market. An example is the extreme expansion of the Austin real estate market after the Texas city became a hub for tech companies. Austin's trajectory to becoming the top location in the U.S. for tech growth was directly followed by an increase in demand for rent and real estate. However, for a complete analysis to be effective, investors also need to consider the supply side of the market that may dampen effects of this growth. 

New real estate "key takeaways"

There is a lot to grasp from our research because it's the first of its kind to solve the "wild card" quotients that cause performance fluctuations in the nations' top markets. Meaning, we can optimize combinations of markets and property types, to enhance returns. Until now, it had been difficult to change investments in real estate on an annual basis to insulate against risk because both the data simply wasn't there and the investment tools didn’t exist to make real-time pivots.’s concept of separate city and property-type portfolios represents a major step toward more dynamic real estate investing.'s method looks at property types in more than 50 markets to list the top performers using returns performance and Sharpe Ratio analysis to identify stable returns based on the highest return per unit of risk. Here are four key takeaways that have been discovered through’s research:

  1. You can enhance returns with a targeted real estate portfolio compared to a broadly diversified one
  2. Markets should be rebalanced annually
  3. Allocations to property types should be revisited annually

1. Picking specific markets and property type beats the "best" diversified REIT portfolio holding.

If you are investing 60 percent in equities, and 20 percent in bonds, and the remaining 20 percent in real estate, the research shows that real estate exposure is better investing in a targeted portfolio with specific markets and property types rather than investing 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 you can see 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 that has the optimal combination of both market weightings and property type weightings. This also causes a 16 percent increase in the Sharpe Ratio, indicating a reduction in the risk being taken on for each unit of returns. For the period from March 2016 to February 2021, the optimal combination of markets and property types for the real estate portfolio is as below:

2. Rebalancing markets annually is better than holding 10 years.

Historically, real estate investing, especially private real estate, requires a long-term buy-and-hold strategy. The asset class typically isn’t liquid enough to enable regular rebalancing. However,’s research indicates that rebalancing your portfolio on an annual basis with new allocations can generate significant improvements in your return profile vs. a typical buy-and-hold strategy. This would suggest investing in a set portfolio with set market weights is not the best approach.

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

So, a strategy that specifically targets the Sunbelt, for example, may underperform compared to a strategy that has specific target weights for different property types and various market combinations. While many groups may identify a list of top markets to invest in, they would be better served to have different lists of markets for each property type given the underlying factors that propel real estate returns are different for each property type.

3. Frequent rebalancing of property types enhances return profile.

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

As you can see in the chart above, the right allocation to each property type was dynamic and shifted significantly from year to year.  In addition to changing market allocations, to achieve the best return profile, the ideal real estate portfolio is dynamic in its allocations to apartment, industrial office and retail.

Thomas Foley is co-founder and CEO of

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