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NCREIF Research Corner

Market Tiers: How Do You Slice the Data?

8/31/2011 10:29:46 PM

This month’s Research Corner looks at market tiers and their performance against each other and over time. Before comparing returns, the first section examines different methods of classifying and aggregating the markets. It defines CBSAs, Divisions and CBSA or Division. The second half of the paper examines returns by tiers over time.


Hi Jeff - enjoyed the Market Tiers article! Would be interesting to dig into the tiers a little further:
  1. Does the volatility vary between tiers?
  2. What is the income return component as compared to the total return for each tier, i.e., do you take more of a pricing / growth risk for one tier than another?
  3. Do the relationships hold consistently over time (as we see large variances in cap rate spreads between the tiers over time)?

Thanks for the feedback. In answer to your questions:

1. The volatility changes a lot. As you might expect, the higher income levels of the Secondary and Tertiary markets reduces their volatility. See the chart below.
20 Year10 Year5 Year

2. The income component is a large portion of the return for all tiers. Over the 20 year period, the income accounts for almost all of the return for Global, Primary and Secondary. The Tertiary markets had a negative appreciation return which offset their higher yields. Over shorter time periods, the Global markets have more growth than the Primary and Secondary markets. All the tiers had negative appreciation over the 5 year period. The differences between the Primary and Secondary markets are minor with slightly more income in the Secondary markets. The Tertiary markets consistently trail on appreciation.

3. The relationships do not hold over time. Depending where we are in the cycle, the relationship relative performance changes.


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