Macroeconomic determinants of real estate returns: An econometric analysis of the macroeconomic influence on the United States Commercial Real Estate returns

Thomas Kofoed-Pihl

Student thesis: Master thesis


Real estate investments have begun to make an impasse in professional investors’ investment portfolios. Real estate is a rather new asset class, and for that reason the knowledge base of the asset is limited and it is less efficient and transparent compared to the stock and bond markets. In that view professional investors lack focus on the market fundamentals given by the development of the macro economy. The aim of this paper is to examine whether the United States commercial real estate market is significantly influenced by changes in the macro economy. In doing so an error correction regression model is developed to econometrically analyse the macroeconomic determinants of the quarterly real estate total returns from 1984-2008. To address the smoothness problem of appraisal-based returns, the Massachusetts Institute of Technology’s unsmoothed transaction-based return index is applied to the regression model. I found that unemployment and the long term interest rate are negatively influencing the total return of the US real estate market, while the gross domestic product over time heavily influences the total return positively. The fourth analysed variable inflation was found not to have any noticeable influence on the return. The conclusions of the analysis reveal the importance of timing the real estate investments according to the development of the macro economy, and consequently that professional investors should focus on the development of the general economy rather than only on real estate specific characteristics.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2009
Number of pages113