Academic journal article
By Louargand, Marc A.
Journal of Real Estate Portfolio Management , Vol. 4, No. 1
Each issue of this journal contains a statement of opinion regarding a topic of interest to real estate portfolio managers. These articles reflect the opinion of their authors, and not the editor of this column, the editorial board of this journal or the American Real Estate Society. Articles in this space are contributed by thought leaders in the real estate portfolio management arena.
Thirty years of real estate analysis has brought me from the point of begging for data to the point of begging for mercy. Our industry is awash in data, information and analysis. Some of this bounty is due to the public real estate phenomenon of the 1990s and some is due to the earlier onset of institutional investors in equity real estate that we saw in the 1980s. What are the implications of this flood of information and the increased insight it should bring about real estate markets? Perhaps a more important question is, will increased information flows in real estate markets prevent us from achieving excess returns? Real estate professionals have long believed that their markets are imperfect and the player with better information could trade on that imperfection and achieve excess returns.
Pondering these questions was greatly aided by the panelists who joined me at the American Real Estate Society meetings in Monterey, California in April 1998. Michael Grupe, Director of Research at the National Association of Real Estate Investment Trusts (NAREIT); Glenn Mueller, Director of Real Estate Research at Legg Mason Wood Walker; Steve Laposa, Manager of Real Estate Research Services for Price Waterhouse; and David Geltner, Professor of Real Estate at the University of Cincinnati. The panelists addressed questions about the impact of information on real estate markets inspired by the fundamental literature of market efficiency, which was developed in the late 1960s and early 1970s. Building off of Markowitz, finance scholars developed a set of views of the capital market that led to the Capital Asset Pricing Model, the Arbitrage Pricing Model and the Options Pricing Model. These views gradually came to hold sway over the U.S. and eventually the global capital market. The development of contingent claims models gave rise to whole new financial industries based upon derivative instruments. In recent years, the doctrine of efficiency has lost some ground to alternative views arising from the fields of chaos theory and behavioral finance. There are at least three parallel developments in real estate during the past two decades that give rise to speculation about the increased efficiency of real estate markets.
First, real estate came under the scrutiny of academics trained in the theory of finance who began to study real estate as an asset class, not a vocation. Since the first publication of the American Real Estate and Urban Economics Journal in 1973, joined by the Journal of Urban Economics (1974), the Journal of Real Estate Research (1986), the Journal of Real Estate Finance and Economics (1988), and now this journal in 1995, these scholars have created a substantial body of literature that addresses real estate markets and real estate investing with the same rigor that can be found in the literature of finance dealing with common equity and fixedincome securities.
Second, institutional investors were attracted to real estate in the early 1980s. Within a few years, pension funds and endowments became the dominant figures in the real estate investment field. These investors were accustomed to having extensive research available to them at little or no cost. Academics began to provide high quality real estate information to this community, just as they had already done for the stock and bond markets. The presence of these investors in real estate markets led to the creation of groups such as NCREIF (National Council of Real Estate Investment Fiduciaries), PREA (Pension Real Estate Association), and their subsequent spin-offs such as RERI (Real Estate Research Institute). …