Risk Factors of U.S. Real Estate Investments

This research investigates macroeconomic risk factors pertaining to the various types of real estate exposure, i.e. direct, listed and non-listed investments. We apply panel model techniques which make it possible to take advantage of both the cross-sectional and time series dimensions of our data. Much emphasis is placed on comparing sensitivities to risk factors across the types of real estate exposure. This is important in order to assess whether indirect (listed and non-listed) exposures react in the same way as direct investments to the macroeconomy and how well such investments replicate direct real estate behavior. The empirical analyses are conducted using U.S. data from 1984Q1 to 2016Q2. Allocations both by sector and geography are taken into account. For indirect exposures, we also control for size and leverage. Our results indicate that the GDP, money supply, construction costs, expected inflation and expected economic activity positively impact returns, while long-term interest rates, the term and credit spreads, unemployment and unexpected inflation negatively impact returns. The various types of real estate exposure generally respond similarly to risk factors.