Re-Thinking Commercial Real Estate Market Segmentation

24 Pages Posted: 17 Oct 2010 Last revised: 3 Jun 2012

See all articles by Franz Fuerst

Franz Fuerst

University of Cambridge - Department of Land Economy; University of Melbourne; City University of New York - Center for Urban Research

Gianluca Marcato

Henley Business School - University of Reading

Date Written: January 29, 2011

Abstract

Identifying groups of comparable individual assets for a relative comparison of investment performance presents a major difficulty for direct real estate investors. The old adage ‘no two properties are exactly the same’ expresses this problem, yet investment managers require reliable this information to assess the performance of individual assets. The most common segmentation currently used in real estate investment analysis combines property sector and geographical region. In this paper, we compare the predictive power of existing industry classifications with a new type of segmentation using cluster analysis on a number of relevant property attributes, including the equivalent yield and size of the property, as well as information on lease terms, number of tenants and tenant concentration. The new segments are shown to be distinct and relatively stable over time. In a second stage of the analysis, we test whether the newly generated segments are also able to better predict the resulting financial performance of the assets than the old two-dimensional segments. Applying both discriminant and neural network analysis we find mixed evidence for this hypothesis. Overall, we conclude that each of the two approaches is valid depending on the specific task at hand. While our new clusters are more suitable for identifying investment opportunities and risks, the old sector-region classification is sufficient for describing the broad characteristics of a real estate portfolio.

Keywords: market segmentation, commercial real estate, financial performance measurement, cluster analysis, neural network analysis, risk diversification

JEL Classification: C45, D4, G11, R33

Suggested Citation

Fuerst, Franz and Marcato, Gianluca, Re-Thinking Commercial Real Estate Market Segmentation (January 29, 2011). Available at SSRN: https://ssrn.com/abstract=1692953 or http://dx.doi.org/10.2139/ssrn.1692953

Franz Fuerst (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/directory/dr-franz-fuerst

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

City University of New York - Center for Urban Research

CUNY The Graduate Center
New York, NY 10011
United States

Gianluca Marcato

Henley Business School - University of Reading ( email )

Department of Real Estate & Planning
Reading, RG6 6UD
United Kingdom
+44 (0)118 3788178 (Phone)
+44 (0)118 3788172 (Fax)

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