How Can We Help You?

Sector and market analytics

Driven by economists and leveraged by market makers.
CRE performance across major metros and asset classes. History and forecast by CBRE.

Thought leaders abound

Depth, breadth and rigor concentrated at all levels.
Synthesizing macro factors and leading indicators into actionable national, sector and market research.

Advantage is CBRE

Perspectives, scale and connections that work.
Commercial and cultural insight aligned with intellectual capital and experience to fuel informed real estate decision-making.

Which data are right for you?

Data views and extracts by scenario and on demand.
Check out the fundamentals, capital markets, and data tools now on our one-pager.

Experience the platform

See first hand why top institutional investors, direct lenders and private equity firms are clients.
Set a time that works for you.

Click the link above to access all EA Insights

A Harry Markowitz tribute: Modern Portfolio Theory and the case for U.S. real estate

Aug 1, 2023, 13:51 PM by Matt Mowell

The headlines say it's time to divest U.S. commercial real estate. Harry Markowitz would probably beg to differ.

Markowitz, a Nobel-Prize-winning economist who passed away in June at age 95, popularized the Modern Portfolio Theory (MPT) as a strategy for producing the best risk-adjusted returns. 

Applying MPT to commercial real estate, we present a scatterplot of the average returns and standard deviations of differently weighted portfolios across the U.S., APAC and Europe. This shows that the optimal commercial real estate portfolio would include more than 50% exposure to U.S. real estate with the balance favoring APAC. This is because APAC has generated notably higher returns than Europe, even though those returns are highly correlated (0.75 correlation) and have very similar standard deviations. The U.S., on the other hand, has produced long-run returns slightly lower than APAC but at a notably lower standard deviation. Further, the U.S.’s is much less correlated with Europe or APAC  -- about 0.33 and 0.31, respectively.

With an ability to aggregate returns, risk and correlations into a single analysis, MPT makes the case that U.S. should still comprise the dominant share of any diversified global real estate portfolio. Of course, this analysis takes a rearview mirror view of returns and does not account for today’s market circumstances, particularly the challenges facing office assets. However, rising interest rates and strained credit conditions are not new, and, even considering today's market dynamics, a long-term investment horizon suggests investors may be overcorrecting away from U.S. real estate.

Markowitz's theory makes a sound argument for the role of U.S. real estate in a balanced global portfolio and offers an antidote to today’s widespread doom-and-gloom.

cotw07312023

 

 

 

 

 

 

Ready to Get Started?

60 second demos.


WATCH NOW

Experience the platform.


TRY IT TODAY

Become a client.


NEXT STEPS
redirect pin user minus plus fax mobile-phone office-phone data envelope globe outlook retail close line-arrow-down solid-triangle-down facebook globe2 google hamburger line-arrow-left solid-triangle-left linkedin play-btn line-arrow-right solid-triangle-right search twitter line-arrow-up solid-triangle-up calendar globe-americas globe-apac globe-emea external-link music picture paper pictures play gallery download rss-feed vcard