Commercial Real Estate Analysis and Investment

Citation

Liow, K. (2002), "Commercial Real Estate Analysis and Investment", Journal of Property Investment & Finance, Vol. 20 No. 3, pp. 304-307. https://doi.org/10.1108/jpif.2002.20.3.304.2

This book, written by two US real estate academics, comprises eight parts and 30 chapters. It is intended to provide a body of knowledge and a rigorous academic framework from which commercial real estate investment analysis can be studied and understood from an economic perspective. This is significant as commercial real estate is an important asset in the US economy and as such requires in‐depth and professional analysis and management. A major strength of the book is, therefore, the vast range of materials reviewed. The authors are highly commended for making a concerted effort to provide a comprehensive, appropriate and useful text in commercial real estate investment and analysis, with examples mainly drawn from the US markets.

The premise of this book is simple: the economic study of real estate is considered from two perspectives: urban economics and financial economics. Urban economics covers the spatial and social phenomena relevant to understanding real estate. Financial economics, which is the primary focus of the book, studies capital markets and how commercial real estate is analyzed from an investment perspective. One commendable point of the book is the authors’ familiarity with and expert knowledge of the two disciplines and their ability to integrate the material together in a comprehensive format. In particular, the coverage on the financial economics aspects of real estate is extensive and includes recent developments in the real estate investment industry such as modern portfolio theory, equilibrium asset pricing models and REIT valuation, drawing on research and empirical evidence mainly in the US context.

The organization structure and chapter layout of the book are clear and well structured. The book progresses from basic underlying concepts and principles in commercial real estate space and asset markets to more specific and specialized considerations and applications. After providing an overview of the real estate system from an economic perspective in Part 1 (two chapters), the authors devote four chapters in Part II to cover some topics of urban economics that are most relevant to commercial property investment analysis. These include fundamental determinants of land value changes over time within a metropolitan area, urban geography and real estate space market analysis. Much of the material covered in these chapters is concise and confined to issues relevant to investment analysis. As such, these chapters are practically very useful for students in disciplines other than urban studies to develop an overall appreciation and understanding of the commercial property market from a “space” perspective.

The main focus of this book – the financial economic studies of real estate – starts in Part III which, together with Parts IV and V, cover basic material and fundamental building blocks of financial economics of real estate. Part III contains three introductory chapters presenting a brief overview and historical investment performance of real estate in the capital markets; the mathematics of present value analysis; and measures of investment performance, periodic, and multiperiod return measures. Then the three chapters in Part IV focus on the core framework of classical financial economics including the wealth‐maximization principle, the DCF and NPV methodologies, and the concept of investment value and its relation to market value, that underlie the valuation and analysis of individual properties and transactions. Finally, the three chapters in Part V examine the role of debt and income taxes in commercial real estate investment, including the capital structure question. Overall, the authors have managed, through the nine chapters in the three parts, to provide a complete coverage of basic investment concepts and procedures that may apply to commercial real estate investment, with a practical focus and provision of appropriate examples. The chapters are thoughtfully presented, easy to read and digestible, although in some cases, lacking in theoretical analyses.

Although the main focus of this book is on equity investment in commercial real estate, the authors include five chapters in Part VI (Chapters 16‐20) to cover the basic concepts, terminology and methodologies of real estate debt from the debt investor’s perspective. These include mortgage fundamentals, economics of the debt market, commercial mortgage investment and underwriting, and commercial mortgage‐backed securities (CMBS). Such coverage is necessary as many major real estate investors, such as pension funds and life insurance companies, deal simultaneously in both equity and debt products as investors. In line with the primary emphasis of the book – real estate equity investment – the authors might appear to be over ambitious as too much information and analyses are included in these chapters.

The macrolevel (i.e. portfolio level) treatment of real estate investment analysis and management appears in Part VII, which comprises seven chapters (Chapters 21‐27). These chapters reflect the growing importance of financial economics in understanding the role of commercial real estate in mixed asset portfolios. The authors start with a presentation of modern portfolio theory (MPT) that provides the foundation for understanding and evaluating the role of real estate in mixed asset portfolios and strategic investment policy implications. Chapter 22 then covers a popular equilibrium asset pricing model – capital asset pricing model (CAPM) – and attempts to briefly evaluate its applicability to real estate equity investment. Additionally, the authors offer some brief explanations on Arbitrage Pricing Theory (APT) and multifactor risk models. Specifically, they discuss the findings of a US study with regard to the application of multifactor risk modeling to commercial real estate. The authors have done a good job of avoiding too much mathematics and technical details in presenting the asset pricing models. In Chapter 24, the authors focus on the valuation of REITs in the stock market and introduce readers to the modern REIT industry in more depth. Finally, some strategic issues unique to real estate and the REIT industry are also considered in this chapter. Other topics included in this part of the book include the “smoothing” problem in appraised‐based return indices and issues related to real estate investment management.

The last part of the book, Part VIII, covers three chapters (Chapters 28‐30) that focus on some microlevel topics important in commercial property development, including land valuation and real option models, and leases and leasing strategy. Research is developing rapidly in these areas. It is therefore very thoughtful of the authors to provide some background material in the topics that will be expected to grow as markets become more global and integrated.

The book will prove of greatest interest to graduate students with a background in business, corporate finance and investment, urban studies or real estate. It provides an excellent overview of various perspectives and issues in the financial economics of the commercial real estate market and attempts to reflect current development in the field. The book is also an invaluable reference for real estate academics and practitioners who are interested in the global capital markets. One final point to note is that examples and references included in the text are mainly based on a USA context although inclusion of more empirical evidence and case examples from other parts of the world will certainly enhance the global perspective reflected in the book.

On balance, the authors have provided a comprehensive, up‐to‐date, and well‐structured coverage of the concepts, principles, application and issues in the financial economics of the commercial real estate market and investment. In addition, the authors have done a good job of striking a delicate balance between practical focus and academic study. Many chapters of the book are easy to read and digestible with provision of ample examples. Some other chapters contain rigorous theoretical analyses and advanced mathematical treatment. In conclusion, the authors have succeeded in creating a clear, comprehensive, readable and valuable text in commercial real estate investment and analysis. The book definitely deserves to be added to your bookshelf!