Working Paper #620
Homeownership and Commercial Real Estate
Manidipa Kapas · Youguo Liang
Housing & Residential Investing Real Estate Investment Trusts Rental
From an individual investor’s portfolio allocation perspective, homeownership is not a substitute for commercial real estate investment. Homeownership refers to real estate one buys and uses as one’s own residence. Commercial real estate includes real properties such as office, retail, industrial and multifamily rental buildings that generate only financial gains (or losses) for the investor. Homeownership is mostly a consumption good and second, an investment asset, whereas commercial real estate is purely investment-driven. Homeownership and commercial real estate are on opposite ends of the income return continuum, with commercial real estate having a positive cash flow and homeownership having a negative carry. This normally leads to a much higher total return for commercial real estate. The demand drivers and supply cycles for homeownership and commercial real estate are mostly unrelated, resulting in only a modest return correlation. In contrast to homeownership, commercial real estate lends itself to the use of sophisticated investment strategies to capture value creation and enhance risk-adjusted returns, such as development forwards, mezzanine debt, private equity in operating entities and international investments.