How Avenue Living’s formidable 2022 provides solid base for 2023

With a cycle-tested business model and a steadfast commitment to the everyday, Avenue Living continued to make great strides.

In 2022, accelerating inflation and rising interest rates created a challenging investment environment, with negative returns flashing across the asset spectrum. Still, that didn’t stop Avenue Living’s 16-year growth streak.

After ending 2021 with just over $3.1 billion in total assets under management (AUM), the organization grew by 48% to reach $4.6 billion AUM. It achieved broadly diversified growth across its multi-family apartment, farmland, and self-storage real estate portfolios — all while staying true to its strategy of investing in the everyday.

“It speaks to the durability of Avenue Living’s business model across multiple market cycles,” says Gabriel Millard, SVP, Capital Markets – Equity & Research. “2008 (GFC) and 2014 (Commodity Crisis) were lost years for many other players, but they were periods of growth for Avenue Living as we leaned into the opportunities. 2022 was another very formative year for us.”

A win-win in the multi-family residential space

Avenue Living entered the apartment space as owner-operators in 2006 with a relentless focus on the resident experience. The company has continued to grow while offering an institutional level of service to those who call its buildings home. A pivotal strategic development was the establishment of the Avenue Living Real Estate Core Trust, which has grown into the first North American Workforce Housing Fund in just five years. Today, Avenue Living’s residential portfolio includes over 15,000 multi-family suites across 3 Canadian provinces and 5 U.S. states.

While headlines around real estate investments tend to revolve around high-growth markets — the likes of Toronto and Vancouver — Avenue Living leans into moderate growth markets, such as the Prairie provinces, where assets are valued at a relative discount. Its vertically integrated business model has also allowed it to control operational costs.

Those factors have enabled Avenue Living to responsibly raise rents in pace with higher inflation and interest rates, without hurting residential stakeholders. “We’re achieving our targeted returns while still maintaining affordability for our residents,” Millard says. “We’ve seen collections improve, occupancy continued to tick up, and we have wait lists at over 100 of our buildings.”

Growing opportunity in Canada’s breadbasket

Meanwhile, Avenue Living’s farmland holdings have expanded from 49,000 acres of Saskatchewan farmland at the end of 2021, to over 83,000 acres today. 

In terms of global output, Canadian farmland represents a large portion of durum wheat, peas, and other important base crops. Saskatchewan is a big piece of the agricultural puzzle, as it accounts for approximately 40% of the cultivated acres in Canada.

“We’re witnessing a breakdown in the global food supply chain,” Millard says. “Canada has a real opportunity to be a world leader in ensuring food security.”

With a history of outperforming inflation over the past 30 years, farmland is also growing more attractive as a diversifying asset class. That’s bolstering Avenue Living’s bullish view on Saskatchewan farmland, which remains at a steep discount compared to neighbouring provinces.

Great strides in self-storage

The Mini Mall Storage Properties Trust has also cemented itself as a premier player in the secondary and tertiary markets of North America’s self-storage industry.
From just over 2 million square feet at the end of 2021, the trust has grown to nearly 6 million square feet of self-storage space. That expansion was partly driven by Avenue Living’s ability to introduce its proprietary technology stack and operating expertise into all the new locations it enters.

“A lot of innovation has happened in the primary downtown, new-development segment of self-storage over the past decade,” Millard says. “We’re taking that approach and applying it to older legacy-run assets that have traditionally operated as mom-and-pop, cash-and-paper businesses.”

Avenue Living is pushing for more growth through a new office in Dallas, where it has hired key industry leaders in the self-storage landscape.

“Our expansion into Texas has taken us from a smaller, scrappy Alberta-based company into a truly North American player,” Millard says. Mini Mall Storage is now a top 25 self-storage operator in North America.

More milestones

Above the 49th parallel, Avenue Living has arrived on Bay Street with a new Toronto office. With that new foothold in Canada’s financial hub, the company is positioned to further reinforce and broaden its capital base in the years to come.

With about $160 million in expenditures made toward capital improvements in its residential properties, Avenue Living is also sharpening its focus on maintaining a superior resident experience and providing great customer service.

After becoming a PRI signatory in 2021, the company is doubling down on sustainability through a partnership with the Canada Infrastructure Bank, which includes a $150-million co-investment on deep energy retrofits on its older-style multi-family assets.

“Real estate – especially older stock properties – represents a significant portion of GHG emissions in Canada,” Millard says. “Our goal is to reduce GHG emissions by at least 49% through deep energy retrofits”.

Leveraging its unique perspective on workforce housing, Avenue Living has also published industry-leading papers and research. That includes a peer-reviewed paper on the residential housing spectrum, which unpacks the nuances of typical renter demographics, as well as their needs in terms of rental housing.

“We’ve published a number of white papers on the importance of affordability, and how a changing cost of capital affects real estate across different markets and asset classes,” Millard says. “We’re really solidifying ourselves as thought leaders within the industry, while continuing to advocate for our residents and provide value for our investors.”

The way forward

Avenue Living has built a strong capital stack. Coupled with a diversified equity base and the use of longer term, fixed-rate debt instruments, Avenue Living is focusing on innovation and investment to ensure strong same-door performance and operations in 2023. It also plans to continue focusing on active property management to deliver the best possible results for residents and investors alike.

“We’re heading into a world with a lot of dark clouds, but we’re seeing opportunities in the market. We’re in a defensible position, and we are aiming to take advantage of any disruptions that may come,” Millard says. “2023 is going to be an interesting year globally, and a very exciting year for Avenue Living.”

This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at https://avenuelivingam.wpenginepowered.com/forward-looking-statements for additional information regarding forward-looking statements and certain risks associated with them.

Avenue Living Wins Gold in 12th Annual Best in Biz Awards

The organization demonstrates a commitment to innovation, sustainability, and customer service excellence. 

Calgary, Alberta – December 7, 2022 – Avenue Living Asset Management (“Avenue Living”) has been named a gold winner for Company of the Year – Canada by the Best in Biz Awards. 

By investing in the everyday and adding value to its properties, expanding the organization’s footprint, and focusing on its workforce and brand advantage, Avenue Living has demonstrated the ability to be defensible, stable, and strategic in its daily operations and long-term vision to drive value for its customers and stakeholders.  

The 12th annual Best in Biz Awards saw more than 700 entries from public and private companies of all sizes and represents diverse industries and regions in the U.S. and Canada, ranging from global brands to the most innovative start-ups and local companies. This year’s judges highlighted the winning companies’ visionary leadership, innovative strides in the use of new technologies, and the adoption of workplace best practices. Many winners also continued to invest in environmental and corporate social responsibility programs. 

“We’re incredibly proud of the resilience our team and organization showed throughout 2022,” says Jason Jogia, chief investment officer of Avenue Living. “Being named a gold winner for Company of the Year by the Best in Biz Awards is a testament to our team’s commitment to excellence and sustainability in the multi-family industry.” 

Since the program’s inception in 2011, winners of the Best in Biz Awards have been determined by independent judging panels assembled from some of the most respected national and local newspapers, TV and radio outlets, and business, consumer, technology, and trade publications in North America. The 2022 judging panel included, among others, writers from AdWeek, Computerworld, Forbes, The Globe & Mail, Inc., The Oregonian, and Portland Tribune. 

“The depth and breadth of this year’s nominees in Best in Biz Awards – and especially the winners – demonstrate savvy business acumen among the leadership and represent the type of entrepreneurship powering today’s economy,” said Dustin Klein, Smart Business, judging his first Best in Biz Awards competition.

After reviewing hundreds of submissions, the judges were impressed with Avenue Living’s growth, both in terms of employee numbers and assets under management. They highlighted Avenue Living’s focus on serving all stakeholders, including offering new features such as integrated payments through its fin-tech platform, Zenbase. Its resident retention and Google reviews clearly showcase how this has resulted in high resident satisfaction. In addition, the panel emphasized Avenue Living’s commitment to sustainability and its involvement in the United Nations-supported organization, Principles of Responsible Investment, to spearhead environmental retrofits, implement smart solutions, and update aging assets. 

For a full list of gold, silver and bronze winners in Best in Biz Awards 2022, visit: http://www.bestinbizawards.com/2022-winners.  

About Avenue Living Asset Management 

Founded on the principle of investing in the everyday, Avenue Living focuses on opportunities that are often overlooked by others, having grown to $4.25 billion CAD in aggregate assets under management across four private real estate investment mandates. The Avenue Living team includes over 900 professionals with expertise in real estate operations and transactions, property management, research, investment origination, and capital markets, as well as a suite of subject matter experts to support Avenue Living’s growing portfolio of multi-family residential, commercial, agricultural land, and self-storage assets. In addition to 15,000 multi-family units located in Canada and the United States, Avenue Living and its related entities own over 496,500 square feet of commercial space, 82,900+ acres of productive farmland, and more than 5 million square feet of self-storage space.   

About Best in Biz Awards 

Since 2011, Best in Biz Awards has been the only independent business awards program judged by a who’s who of prominent reporters and editors from top-tier publications from North America and around the world. Over the years, judges in the prestigious awards program have ranged from Associated Press to the Wall Street Journal and winners have spanned the spectrum, from blue-chip companies that form the bedrock of the global economy to some of the world’s most innovative start-ups and nimble local companies. Each year, Best in Biz Awards honors are conferred in two separate programs: North America and International, and in 100 categories, including company, team, executive, product, and CSR, media, PR and other categories. For more information, visit: http://www.bestinbizawards.com. 

This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at https://avenuelivingam.wpenginepowered.com/forward-looking-statements for additional information regarding forward-looking statements and certain risks associated with them. 

Cultivating Alpha Opportunities in Canada’s Breadbasket

For investors seeking stable returns from agricultural farmland, Saskatchewan-focused fund may be the ideal play. 

As an alternative investment, farmland has historically offered the potential for diversification and inflation protection within institutional portfolios and family offices. As investors look to fortify their portfolios against economic and market headwinds, the Avenue Living Agricultural Land (ALAL) Trust is turning heads. Launched in 2016, the first closed-end fund of the ALAL Trust has grown by 12.6% on an annualized basis. The portfolio holds 83,000 acres of productive farmland in Saskatchewan valued at $175 million. With that fund now closed, Avenue Living is set to launch a new open-end investment vehicle to provide investors with indirect exposure to farmland.

This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at www.alamstg.wpenginepowered.com for additional information regarding forward-looking statements and certain risks associated with them. 

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Avenue Living Surpasses $4.25 Billion in Assets Under Management

Calgary, Alberta, October 18, 2022 – Avenue Living announced today it has exceeded $4.25 billion in assets under management (AUM).  

Following a series of key acquisitions in its multi-family residential, self-storage, and agricultural funds, Avenue Living reported this significant milestone, representing a 4X increase to its AUM since 2018. Headquartered in Calgary, Alberta and Dallas, Texas, the organization has grown to over 900 employees in seven provinces and 13 states, with additional plans for growth on both sides of the border.   

“Our business philosophy of ‘investing in the everyday’ means that we see potential in properties and markets that others often overlook,” says Anthony Giuffre, founder and CEO of Avenue Living. “We have built a scalable, defensible model that continues to perform through varying market cycles, and we have effectively institutionalized low-density property management by developing an infrastructure that is sustainable and repeatable.”  

Starting in 2006 with its first acquisition of a 24-unit property in Brooks, Alberta, the journey to becoming one of Canada’s largest property owners in both the multi-family rental residential and self-storage sectors has resulted from a clear, strategic focus on the North American Heartland. The organization has a well-researched understanding of the unique demographic profile, dubbed ‘workforce housing’, which it defines as a subset of the economy earning between $15 and $50 per hour.   

Jason Jogia, chief investment officer at Avenue Living states, “The days of passive income through property ownership are ending. In the largely unconsolidated markets we enter, legacy owners are looking for succession plans for their properties and businesses.” Jogia asserts that, “We find and acquire properties that are underperforming, and invest in strategic operational, capital, and technological enhancements to bring these properties up to the Avenue Living standard. These improvements not only enrich the customer experience but improve the operating performance of the property. Our growth is measured, conservative, and deliberate across the geographies we target; and the assets we choose have proven to be defensible through times of volatility.” 

Avenue Living is the second largest building operator in Canada by roofline and has 10 per cent of their residential multi-family portfolio in the United States. The organization’s self-storage fund, Mini Mall Storage Properties, has grown exponentially in just over two years with over 4.6 million square feet of storage space and 56 per cent of its facilities in the U.S.. In addition, Avenue Living Agricultural Land Trust steadily grew across the Canadian Prairies, with 82,900 acres under ownership and leased as active farmland.  

The organization’s focus away from ‘shiny objects’ has historically insulated the portfolio from the high highs and the low lows seen in high-growth markets. “Our growth is intentional; it creates economies of scale and scope, which continuously enhances our operational excellence,” says Gabriel Millard, senior vice president of capital markets. “We focus on markets that have historically exhibited low to moderate growth, where we use our expertise to manufacture alpha. As we see a resurgence across the North American Heartland, we are well positioned to continue capturing the upside of this economic trend.”  

ABOUT AVENUE LIVING   

Founded on the principle of investing in the everyday, Avenue Living focuses on opportunities that are often overlooked by others, having grown to $4.25 billion CAD in aggregate assets under management across four private real estate investment mandates. The Avenue Living team includes over 900 professionals with expertise in real estate operations and transactions, property management, research, investment origination, and capital markets, as well as a suite of subject matter experts to support Avenue Living’s growing portfolio of multi-family residential, commercial, agricultural land, and self-storage assets. In addition to 15,000 multi-family units located in Canada and the United States, Avenue Living and its related entities own over 496,500 square feet of commercial space, 82,900+ acres of productive farmland, and more than 4.6 million square feet of self-storage space.   

All financial figures are in Canadian dollars. 

This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at www.alamstg.wpenginepowered.com for additional information regarding forward-looking statements and certain risks associated with them.   

Manufacturing Alpha: Avenue Living’s Three-Factor Formula for Success

Our CIO, Jason Jogia, joined @Wealth Professional to discuss the strategy that sets Avenue Living apart, allowing us to thrive regardless of market conditions.

“We’ve always had to manufacture alpha by out-operating our peers,” says Jason. “By being able to operate effectively, we’ve been able to create a defensible multi-family portfolio.” 

Our approach is built on three key drivers: strategic diversification, customer focus, and operational integration. Read more about these foundational elements and how they have allowed us to build a successful business model.  

 

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Diversification With and Within Real Estate

Authors

Grant Alexander Wilson, Ph.D., Assistant Professor, Faculty of Business Administration, University of Regina

Jason Jogia, MBA, M.Fin., Chief Investment Officer, Avenue Living

Author Bios

Dr. Wilson is an Assistant Professor at the Hill and Levene School of Business, University of Regina. His research focuses on marketing, strategy, and innovation. He has published over 20 peer-reviewed articles in top management journals including Journal of Small Business Management, Research-Technology Management, and Journal of Business Strategy. His research has been featured in the National Post and by the World Economic Forum. Dr. Wilson is also a research consultant and contributor to Avenue Living Asset Management.

Mr. Jogia is the Chief Investment Officer at Avenue Living and has over 15 years of experience in real estate capital markets, originating over $10 billion in real estate loans and $1 billion in equity. He has extensive experience in real estate investment analysis and capital structure across various real estate classes. In addition to holding 2 Masters’ degrees in Finance, Mr. Jogia is pursuing his Doctorate of Business Administration and currently serves as an instructor at the University of Calgary, specializing in real estate finance.

INTRODUCTION

Diversification is synonymous with “not putting all your eggs in one basket.” If the basket drops, all of the eggs break. Therefore, placing eggs in multiple baskets – the act of diversifying – reduces such risk. The concept of diversification has a long history in finance and portfolio management (Markowitz, 1952). Diversification is a strategy that aims to reduce risk through the inclusion of multiple and differing investments. “The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security” (Segal, 2021). This paper first explores modern portfolio theory, the mechanics of how diversification reduces risk. Next, it examines the importance of diversifying portfolios with real estate investments and diversification within real estate portfolios for institutional investors. Last, the paper explores the limitations of diversification and advantages of specialization for small real estate owners/operators. It concludes by offering strategic directives for real estate investors.

MODERN PORTFOLIO THEORY

Developed 70 years ago by economist Harry Markowitz, modern portfolio theory can hardly be considered “modern.” Despite its age, modern portfolio theory’s relevance is timeless, as it offers a framework for designing portfolios that maximize return and minimize risk (McClure, 2021). According to Markowitz (1952), an investment’s risk comprises systematic and unsystematic risks. “A systematic risk is one that influences a large number of assets, each to a greater or lesser extent” (Ross et al., 2007). Systematic risks are also called market risks (e.g., recession) and cannot be eliminated by diversification (McClure, 2021). Conversely, “an unsystematic risk is one that affects a single asset or small group of assets” (Ross et al., 2007). Unsystematic risks are also known as asset-specific risks (e.g., supply shortage of a company’s input) and can be reduced through diversification. Markowitz (1952) argues that overall portfolio risk can be reduced to a certain point by diversification, as the inclusion of investments that do not move proportionally in the same direction at the same time eliminate unsystematic risk (Figure 1).

FIGURE 1 – MODERN PORTFOLIO THEORY

diversification with real estate

Sources: McClure (2021), & Ross et al. (2007)

Although modern portfolio theory was quickly and heavily embraced in the stock and bond markets, its application to real estate was much slower (Viezer, 2010). Only in the 1980s were diversification and modern portfolio theory applied to real estate. Today, savvy investors both diversify portfolios to include real estate and diversify within real estate investment portfolios.

DIVERSIFYING WITH REAL ESTATE

Miles and McCue (1984) were the first to show that real estate investments were significantly correlated with inflation, providing support for real estate as an investment hedge. Miles and McCure’s (1984) findings are highly relevant today, as recent examinations show that capital appreciation of real estate assets outpaces inflation (Wilson, 2021). Researchers have also shown that real estate investments have low correlations with stocks and bonds (Miles & McCue, 1982; Miles & McCue, 1984; Robichek et al., 1972; Viezer, 2010; Zerbst & Cambon, 1984), making them ideal for diversification (Markowitz, 1952; Ross et al., 2007).

The question of how much real estate to include in an investment portfolio has been widely debated (Firstenberg et al., 1988; Fogler, 1984; Giliberto, 1992; Hartzell, 1986; Irwin & Landa, 1987; Kallberg et al., 1996; Webb et al., 1988; Webb & Rubens, 1987; Viezer, 2010; Ziobrowski & Ziobrowski, 1997). Hartzel (1986) recommended smaller real estate investment allocations, such as 3% to 11%. Kallberg et al. (1996) and Giliberto (1992) offered similar recommendations of 10%. Firstenberg et al. (1988), Folger (1984), and Irwin and Landa (1987) argued that portfolios required 15% to 20% of real estate investments to achieve maximum diversification benefits. Ziobrowski & Ziobrowski (1997) concluded that 20% to 30% of an investment portfolio was necessary to realize the greatest return. Others have suggested that the majority of one’s portfolio should be comprise of real estate investments (Webb et al., 1988; Webb & Rubens, 1987). Despite the contrasting empirical evidence, research overwhelmingly supports the inclusion of real estate in portfolios to reduce risk and increase return (Viezer, 2010).

To illustrate, an examination of changes to home prices, land values, stocks, and bonds illustrates the benefits of Canadian real estate (Figure 2).

FIGURE 2 – ANNUAL CHANGES TO CANADIAN REAL ESTATE, STOCKS, & BONDS

Diversification with real estate

Sources: Bank of Canada (2022), Farm Credit Canda (2021), Statistics Canada (2022), Yahoo Finance (2022)

The new house price index – a measure to assess changes to home prices in Canada – has shown consistency and strong year-over-year appreciations, particularly from 2019 to 2021 (Statistics Canada, 2022). Annual changes to Canadian farmland values have also been favorable and consistent, ranging from 4% to 8% in the period examined (Farm Credit Canada, 2021). In contrast, the S&P/TSX composite – the benchmark Canadian stockmarket index – has shown double-digit returns but also extreme volatility from 2016 to 2021 (Yahoo Finance, 2022). Over the last several years, Canada’s 10-year government bond has offered stability, but at the expense of nominal returns (Bank of Canada, 2022).

The risk and return benefits of real estate – demonstrated by past empirical examinations and in the above depiction – emphasize the need to include real estate in investment portfolios for diversification. According to Viezer (2010), “first decide the optimal allocation of real estate to a multiasset portfolio, and then decide how to diversify within the real estate portfolio.”

DIVERSIFYING WITHIN REAL ESTATE

Researchers have debated the most effective means to diversify real estate portfolios, as unsystematic risk can be reduced by property type, geographic, and financial diversification (Anderson et al., 2015; Benefield et al., 2009; Campbell et al., 2003; Cici et al., 2011; Cronqvist et al., 2001; Gobbi & Sette, 2014; Gyourko & Nelling, 1996; Hartzell et al., 2014; Ioannidou & Ongena, 2010; Ro & Ziobrowski, 2011; Santos & Winton, 2008).

According to Miles and McCue (1982), property type diversification offers the greatest return and the lowest risk. This has been replicated in studies of real estate investment trusts (REITs). Benefield et al. (2009) and Row and Ziobrowski (2011) show that diversified REITs outperform specialized REITs. Anderson et al. (2015) corroborate these findings, showing that diversified REITs have a “strong positive relationship” with return on assets, return on equity, and Q ratios (market value to asset replacement cost). Anderson et al. (2015) explain that “the diversification benefit comes from both the ability to select better-performing property types in ‘hot’ markets and the limited exposure to poorly performing property types in ‘cold’ markets” (p. 48). In addition to property type diversification, diversifying with private or public REITs has its advantages. According to Blackstone (2022) and Wang (2021), private REITs generally increase in times of rising interest rates and have less volatility, as compared to public REITs. As such, unsystematic risk can be reduced by REIT type (e.g., public/private) and property type (Gyourko & Nelling, 1996).

There is a significant body of research that shows the benefits of geographic diversification (Campbell et al., 2003; Cici et al., 2011, Cronqvist et al., 2001; Feng et al., 2021; Hartzell et al., 2014; Jud et al., 2021; Oertel et al., 2019). Hartzell et al. (1987) argued that diversification based on geography was strategic, given the performance benefits. As with property type diversification, geographically diverse REITs have been shown to outperform geographically concentrated REITs. According to Feng et al. (2021), “geographic diversification is associated with higher REIT values for firms that can be described as being more transparent” (p. 267). Recent work by Jud et al. (2021) and Oertel et al. (2019) adds to such geographic diversification research, showing international acquisitions offer enhanced portfolio returns.

Grissom et al. (1987) acknowledged the performance benefits of diversifying by both property type and geography. In fact, this research showed that diversification “across markets and property type reduced unsystematic risk more than across just markets or across just property types” (Viezer, 2010). Accordingly, Grissom et al.’s (1987) research supported the combination of property type and geographic diversification to reduce risk and increase returns. A lesser-explored area of research suggests that financial diversification may also reduce unsystematic risk among real estate investments.

There is an inherent risk in concentrated borrowing. According to Gobbi and Sette (2014), in times of crisis concentrated borrowing is detrimental to a firm’s access to credit. Moreover, Ioannidou and Ongena (2010) find that interest rates increase for clients over time and companies can negotiate better deals in new relationships with different banks. Therefore, it is strategic for real estate companies to diversify their borrowing to reduce unsystematic risk and negotiate better interest rates.

It is evident that diversification with and within real estate (e.g., property type, geography, and financial diversification) is necessary to maximize returns and minimize risk, but can endless diversification reintroduce risks?

OVER-DIVERSIFICATION & SPECIALIZATION

When strategically executed, diversification is a proven method to reduce risk and increase return (Allison, 2021). However, it is possible to over-diversify. Investments that are not strategically motivated are unadvisable (Olgun, 2005), as they add unnecessary risk to the portfolio without the added upside (Allyson, 2021). Lynch (1989) coined this phenomenon of worsening the risk and return tradeoff of an investment portfolio by over-diversifying as “diworsification.” This paper argues that the real estate diversification and performance relationship is curvilinear, similar to other strategies (Bhuian et al., 2005; Oswald & Brettel, 2017; Tsai et al., 2008). While diversification is necessary to reduce risk and increase return, beyond a certain level it can become detrimental to portfolio performance (Figure 3).

FIGURE 3 – DIVERSIFICATION & PERFORMANCE RELATIONSHIP

diversification with real estate

Diversification is also not advisable for new or small owners/operators. According to Kenton (2022), a specialization strategy focuses on limited scope and expertise for greater efficiency and performance. Specialization has been shown to create economies of scale, improve market positions, and enhance the bottom line of small businesses (Intihar & Pollack, 2012; Williams et al., 2018; Wilson et al., 2020). New or small real estate owners/operators are more likely to benefit from a specialization versus diversification strategy, as eliminating unsystematic risk is unlikely due to the small number of properties, geographic concentration, and individual property management. As these new and small owners/operators mature and expand, a diversification strategy becomes more advantageous and reduces their accumulated unsystematic risk.

STRATEGIC DIRECTIVES

So how much real estate diversification is enough, and how much is too much? Diversification with and within real estate is necessary for investors. However, Olgun (2005), aptly states that non-strategic real estate investments are problematic and often produce “negative abnormal returns.” Instead, when real estate investments are strategically included in multi-asset portfolios they increase return and reduce unsystematic risk (Miles & McCue, 1982; Miles & McCue, 1984; Robichek et al., 1972; Viezer, 2010; Zerbst & Cambon, 1984). Diversification within real estate is also required to eliminate unsystematic risk and realize the greatest level of return (Grissom et al., 1987; Hartzell et al., 1987; Jud et al., 2021; Miles & McCue, 1982; Oertel et al., 2019, Viezer, 2010). As Grissom et al. (1987) suggest, the best results come from combined diversification methods (e.g., property type and geography). It is further argued that financial diversification can also help reduce unsystematic risk and lower borrowing costs. In the context of Canada, investment portfolios that include residential real estate and farmland as core assets appear to both enhance value and offer stability. Diversification within these real estate investment categories, such as the types of residential real estate and various Canadian sub-markets, are also likely to enhance the overall portfolio of investors. As Peter Bernstein, one of the most prominent American economists wrote, “diversification of risk matters not just defensively, but because it maximizes returns as well, because we expose ourselves to all of the opportunities that there may be out there.”

 

 

REFERENCES

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