How Does Property Location Influence Investment Risk and Return?

A property’s location is often considered to be the ultimate determinant of its investment performance. But how exactly does a property’s location influence its risk and return? The authors focus on the effects of location density on the risk and return of commercial real estate investments. They do this by studying the geographical characteristics of the property portfolios of U.S. equity REITs. The paper shows that REITs with property holdings in high-density locations experience higher NOI growth, earn higher risk-adjusted returns, and carry higher systematic risk than their otherwise comparable peers in low-density locations. Those high-density REITs also have lower leverage, better access to public bond markets, and lower implied cap rates. Their results suggest that location density is an important determinant of REIT performance outcomes and financing choices, consistent with geographical characteristics playing a significant role in driving patterns of investment risk and return across commercial real estate markets.