Apartment volatility determinants across the United States markets

Abstract

Much research has been done to examine the volatilities of return on public and private real estate investments. However, little is known about market volatility in real estate in general and in apartment real estate in particular. This paper uses 21-year quarterly data across 46 markets in the United States to analyze the market volatility behavior of apartment real estate markets. In addition to summarizing the general profile of apartment volatilities such as vacancy change and revenue change, this paper conducts a significant amount of cross-sectional time-series regression analysis to test the determinants of such volatilities. It is found that demand volatilities dominate the volatility of vacancy change of apartment markets. As for the revenue change volatility, it is almost equally determined by occupancy change and rent change volatilities. Furthermore, the paper finds that big markets, fast economic growth, and a decreased concentration magnitude tend to reduce vacancy and revenue volatilities. Regulations on redevelopment tend to increase the volatilities of revenue change and rent change. The supply elasticities are proved to increase the volatility of vacancy change and revenue change, but to decrease the volatilities of demand and rent change. This paper provides a better understanding of apartment market volatilities, and can be used to hedge risk by improving apartment diversification strategies for both private equity real estate firms and public real estate investment trusts (REITs).