The Journal of Real Estate Finance and Economics
Volume 14, Issue 3, Article 2 (Abstract)
Title:	Economic Risk Factors and Commercial Real Estate Returns
Author:	David C. Ling and Andy Naranjo
Abstract:	A great deal of research has focused on the linkages between stock and bond market returns and macroeconomic events such as fluctuations in interest rates, inflation rates and industrial production. Although the comovements of real estate and other asset prices suggests that these same systematic risk factors are likely to be priced in real estate markets, no study has formally addresses this issue. This study identifies the growth rate in real per capita consumption, the real T-bill rate, the term structure of interest rates, and unexpected inflation as fundamental drivers or "state variables" that systematically affect real estate returns. The finding of a consistently significant risk premium on consumption has important ramifications for the vast literature that has examined the (risk-adjusted) performance of real estate, for it suggests that prior findings of significant abnormal returns (either positive or negative) that have ignored consumption are potentially biased by an omitted variables problem. the results also have important implications for dynamic asset allocation strategies which involve the predictability of real estate returns using economic data.
Keywords:	real estate returns, asset pricing, economic risk factors, risk premiums, multibeta asset pricing model, systematic risk