Spatial Statistics Applied to Commercial Real Estate

Portfolio theory shows that diversification can enhance the riskreturn trade-off. This study uses the absolute location of commercial real estate property along with spatial statistics to address the inherent problem of determining geographical diversification based upon a set of economic and property-specific attributes, some of which are unobservable or must be proxied with noise. We find that commercial real estate portfolios exhibit statistically significant spatial correlation at distances ranging from adjacent zip codes to neighboring metropolitan areas. Given the common structure Research supported by a grant from the Real Estate Research Institute. We thank an anonymous referee, Richard Buttimer, the editor, Jeff Fisher, David Geltner, Marc Louargand, Glenn Mueller, Tony Sanders, C.F. Sirmans, and seminar participants at the RERI conference, UNC-Charlotte, and UT-Arlington for their suggestions and guidance. Special thanks to Robert White of Real Capital Analytics for data. D. K. Hayunga (B) Department of Finance and Real Estate, University of Texas at Arlington, Box 19449, Arlington, TX 76019, USA e-mail: [email protected] R. K. Pace LREC Endowed Chair of Real Estate, Department of Finance, E.J. Ourso College of Business Administration, Louisiana State University, Baton Rouge, LA 70803-6308, USA e-mail: [email protected] URL: www.spatial-statistics.com 104 D.K. Hayunga, R.K. Pace of dependence found in the data series, we discuss feasible strategies for obtaining diversification within direct-investment real estate portfolios.