Macroeconomic Uncertainty and Predictability of Real Estate Returns: The Impact of Asset Liquidity

Recent research has shown that macroeconomic uncertainty is a significant factor that is contemporaneously incorporated into asset returns. Therefore, it should not have a role in predicting future returns. At the same time, separate research has demonstrated that illiquidity is related to future returns. We examine the interplay between these two dynamics in a commercial real estate setting, where (il)liquidity is a defining characteristic of the asset class. Empirical tests confirm the absence of return predictability for liquid assets (publicly traded property portfolios). However, we find significant return predictability predicated on ex ante macroeconomic uncertainty when we examine assets that are not as liquid (directly held property portfolios). Our findings are robust to several refinements, including adjustments for delays in the transaction closing process to establish transaction prices in the directly held market, controls for leverage inherent in publicly traded real estate asset returns, and pro-cyclical liquidity variation in private real estate markets.