Beta-risk, the risk derived from broad, national market movements rather than local factors, has become relatively more important over time for real estate. Evidence indicates that beta-risk, which is non-diversifiable, has a distinct cyclical component, rising in down markets. Hence, diversification does not work as well when investors would most value it. Perhaps most importantly, there has been a secular upward trend in the importance of beta-risk in the real estate market. This upward trend has been concurrent with increased integration of real estate with the broader capital markets; as property values are increasingly driven by capital market factors that are common to all locations, returns to different locations have become more highly correlated. The increased importance of beta-risk implies that diversification in real estate, at least by MSA, is less effective than it once was.
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