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I nstitutional portfolio management, regardless of asset class, relies on a process. In some instances, the process may be top-down and market oriented. In other situations, the manager can be asset-specific or bottom-up in perspective. Of course, an integrated and iterative approach combines both points of view in making investment decisions.
Likewise, portfolio management across every asset class balances the art and science of investment decision making. The same is certainly true for institutional-grade, commercial real estate investment, although the balance may seem more nuanced. For example, can real estate investors implement investment strategies associated with other asset classes when individual properties are heterogeneous and uniquely owned? In the securities markets, two investors can implement the same strategy with the same security as each is homogenous. For this reason, considerably more publication space has been given to markets where multiple investors might simultaneously implement a common investment strategy.
Our goal is to offer insight on commercial real estate portfolio management and the asset selection component of the top-down investment decision-making process by focusing on market selection strategies at the city or metropolitan-level. We examine two investment strategies that have become increasingly popular with practitioners and can be applied across a wide set of assets: a value strategy and a momentum strategy.
Recently, Asness et al. [2013] authored a remarkably comprehensive study of these two strategies. Although the title of their paper is "Value and Momentum Everywhere," considering a wide range of investment options, commercial real estate was not included in the study. In a sense, the "Everywhere" claim falls just short.
We aim to address this omission by applying their approaches to the analysis of market- or metro-level selection and timing for institutional commercial real estate portfolio managers. The intuition in our analysis is important as it translates into economic value for investors, sponsors, and portfolio managers. Although the investment portfolios we construct at the market level are not directly tradable, the implications and lessons are both bankable and executable as part of a top-down investment strategy.
The value effect is based on the notion that an asset's relative current value is related to future return performance. The momentum effect finds past performance is tied to future returns. To our knowledge, no study simultaneously examines...