USA Real Estate: Looking Interesting Macro-wise

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

December 2010

Your humble author had looked at some macro data on the USA real estate market sectors in August 2009 and written a piece titled “Price Fall Not Over Yet and Beware of Retail” [ http://www.real-estate-tech.com/articles/SRS080902.htm ].

In recent days, he has again reviewed the latest available information and finds the overall picture becoming increasingly enticing. There could perhaps be investment opportunities. Here are the analyses: 

a)      Data and information source = the website of the Center for Real Estate at the Massachusetts Institute of Technology [http://web.mit.edu/cre/research/credl/rca.html]. The price index data date from the year 2000 and include the market sectors of rental apartment, office, retail, and industrial.

b)      Methodology = we calculated the standard deviation of the quarterly price index data stream of each of the above market sectors, thus obtaining a high standard deviation level, an average level, and a low standard deviation level. As such, the latest price index could be compared against these 3 levels in order to gauge whether it is way off high, or low, or about average within the period (4Q 2000 – 2Q 2010) concerned. This would in turn help with ascertaining the possibility of price gains and / or downside risks.

c)       The current price indexes of ALL four market sectors are now between the average and the low standard deviation levels = albeit to varying degrees and there are slight differences in terms of volatility measurements. Here are the charts.

Stating the obvious, and if one looks at the last few quarters only, the apartment sector is tending upward while the office seems to be stabilizing. On the contrary, the retail and industrial sectors tend to be trending down still.  

d)      The retail sector appears to harbor the best possible potentials = when one compares the current price index of each of the market sectors to its related high standard deviation, average, and low standard deviation levels, one can calculate the percentage the current price index is above or below the three said levels respectively. Here is a table summarizing our findings.

For clarity, one may read the above chart as follows. Take the apartment sector, for example, IF the price index is to take a dive to its low standard deviation level, then it would imply a drop of around 15%. Conversely, IF the price is to recover to its average position or, better still, the high standard deviation level, then it would mean a price increase of 8% or 31% respectively.

Naturally, there is nothing to suggest future prices could only fluctuate between the observed high standard deviation level and low standard deviation level. Nonetheless, assuming that each market sector is to do that, the retail sector offers the best possible potentials. While its downside is limited to around dropping a further 3% to the low standard deviation level, its upside could be as high as increasing almost by half.

By no means is the above analysis a complete or comprehensive one, as we have only used the national data within perhaps no more than one real estate cycle. Still, it serves as a useful indication to carry out further investment contemplation.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.    

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