Academic journal article The Journal of Real Estate Research

Institutional-Grade Properties: Performance and Ownership

Academic journal article The Journal of Real Estate Research

Institutional-Grade Properties: Performance and Ownership

Article excerpt

Abstract

Quality commercial properties differ in operating performance not only on physical characteristics but in type of ownership, management, and control. For 1996-2001 data on Atlanta apartments, a primary market for multiple types of investors, there is varying operating performance by ownership. Larger-scale owners and local property managers earn higher effective rents.

Owners of similar assets with common physical characteristics are assumed to obtain the same performance. Evidence from real estate markets suggests otherwise; characteristics of the owner influence the price. In the residential housing market, when buyers are under time pressure or have school-age children, they pay higher prices for their homes (Harding, Rosenthal, and Sirmans, 2003). For commercial properties, Lambson, McQueen, and Slade (2004) find that outof-town buyers pay higher prices than locals. An extension of this reasoning is that local owners have advantages over out-of-town owners.

A related issue is whether there are differences in the operating performance of properties based on ownership structure in terms of management, firm size, and control. In operating performance, these differences appear in rent and occupancy. These differences can occur even in large, standardized primary-market properties. These properties attract a spectrum of owners and buyers, including local, national, and international operators.1 In these primary and high-grade markets, out-of-town investors compete with locally focused players who can either be large or small operators.

This paper empirically examines two aspects of ownership. The first is whether the property benefits from the size of the firm that operates it. Size of firm is determined by the number of properties under ownership and control within a single market. The other is whether being local, either in ownership or management yields a higher return. Data controls are included for the type, grade, and location of the property, standardized by ownership. The property quality is distinguished by a number of dimensions including age, amenities, and exact latitude and longitude in global positioning.

Evidence of the advantage of local managers over non-local ones has been shown to exist in securities markets, despite the apparent liquidity, divisibility, and efficiency of publicly traded stocks. Coval and Moskowitz (1999) find that money managers obtain higher returns from stock investments that are close to home as measured by distance to the corporate headquarters. That premium increases with smaller size and with leverage, and it is more pronounced in the South and Midwest than on the East and West Coasts of the United States. Fund managers in remote areas who focus on local stocks earn abnormal returns in excess of 2% a year (Coval and Moskowitz, 2001). 2 The local stocks avoided by nearby managers under-perform other local stocks bought and held in portfolios, indicating an information and efficiency knowledge in distinguishing between them.

Even in large-market money centers such as Boston, New York, and Philadelphia, similar local effects appear in securities markets. Hong, Kubik, and Stein (2003) find that mutual fund managers hold similar portfolios to those of other neighboring managers in the same metro area. These portfolios exhibit local preference, on the grounds that it is easier for money managers to monitor local firms' financial performance.3 In managed stock market funds, there is a significantly higher performance for local holdings as opposed to distant portfolios. By analogy, if a local premium associated with management appears in stock portfolios, a comparable test would be whether it occurs for real estate.

Investors typically benefit from diversifying away local risk. Large investors include pension funds and insurance companies that invest nationally and internationally in real estate. They invest in real estate to achieve portfolio diversification, both in a mixed asset and in a real estate portfolio context. …

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