Slicing, Dicing, and Scoping the Size of the U.S. Commercial Real Estate Market
Florance, Andrew C., Miller, Norm G., Peng, Ruijue, Spivey, Jay, Journal of Real Estate Portfolio Management
Executive Summary. We use a Census approach to calculate the size of the built commercial real estate market in the United States. We provide estimates of values at the summary level as of mid and late 2009 and relate these to the concentrations observed by state. This likely corresponds to the bottom of the current cycle providing a reference point for future comparisons. At least $4 trillion has been lost on commercial real estate from 2006 to early 2010. As of the end of 2009, the total value of commercial real estate, excluding parking lots, is about $11 trillion including owner-occupied property. If we eliminate the specialty property or simply use the midpoint in 2009, it is closer to $9 trillion. What is truly amazing is that for some property types, these values are about half of replacement cost.
In finance we often talk about the "market portfolio" when we discuss the topic of where one might invest. We all recognize that this market portfolio consists of more than stocks, corporate bonds, and government bonds. Over significant stretches of recent history, real estate has outperformed stocks and bonds, especially if the analysis stopped in the right years.1 Investors missing these real estate returns from their portfolios have berated investment advisors who generally focused on what they knew. Over time real estate became a respectable asset class, and most sophisticated fund managers consider real estate an essential part of their market portfolio analysis. Not only has real estate become part of mainstream investing but in many cases the market portfolio now includes oil and gold and an array of international investment alternatives, not to mention other exotic choices like pork belly or OJ futures. So, to answer the question of what investment choices an investor has today, we certainly must include all established markets. Once you think you have answered the "what" question, we generate more questions that must be answered, such as how many different categories should we consider and how large is that opportunity? In the stock market, we have observed an endless march over time toward further dissection of stock choices starting from value to growth into a range of micro to large, from domestic to international and with basket choices that exceed the number of direct investments.2 Similarly in the real estate market, we have geographic and property type delineations securitized (public or indirect) and direct (private) and the overall choice of equity or debt positions.
We have seen attempts to quantify the size of the real estate market before and these prior studies will be discussed below, but the question remains: Why does size matter? Assume an analysis of a particular segment of the commercial real estate market, such as private prisons or multi-family property, suggested what in your view provides opportunities for superior or at least market riskadjusted returns and you wish to allocate some funds to this asset type. Now assume you are CALPERs or Singapore's GIC and you wish to allot 10% of your real estate allocation to this segment. Is there enough of it to go around? Would your purchases dominate the market forcing prices up and expected yields down? What if your focus was office properties or industrial in only primary markets? Is there enough and what is the breakdown by type for the whole market? Commercial real estate values may be more easily estimated for various property types in localized areas, but to date all studies on the size of the commercial real estate market have been estimates based on less data than desirable. See, for example, Miles, Pittman, Hoesli, Bhatnager, and Guilkey (1991), Hartzell, Pittman, and Downs (1994), and Malpezzi, Shilling, and Yang (2001) discussed below.
Here we use the best data set assembled to date to help derive new estimates on the size of the commercial real estate market in the United States. There are essentially three methods for estimating the market capital value of real estate: (1) direct measurement of the stock; (2) perpetual inventory adjustment calculations; and (3) statistical extrapolations based on proxies, such as property tax assessments, income estimates, population or other small samples of well-known values aggregated up to a larger scale with ratios to the real estate values represented. …