Roger Ibbotson, a professor of finance at Yale School of Management, brilliantly created the Ibbotson chart to visually illustrate total returns for various asset classes. The Ibbotson chart is simple in nature – it ranks asset class performance from highest to lowest by calendar year. However, there are many traditional uses for this simple chart:
- illustrating the volatility within an asset class
- demonstrating recent momentum and historical patterns of performance
- conveying the cyclical nature of investments and range of performance
- showcasing the value of asset allocation
Does an Ibbotson chart have value to real estate investors and provide actionable insight? We think so.
Case Study: San Francisco
For the purpose of this piece, MPF Research used San Francisco as a case study by ranking metro and submarket level performance by annual revenue change from 2004 through 2013. The chart below provides several key insights. First, it should be noted West San Francisco led all submarkets by outperforming the metro norm in seven of the 10 years. Following closely behind was Downtown San Francisco and South of Market, which outperformed six of the 10 years, or 60% of the time. Historical statistics serve as a baseline to improve your probability of success. However, the concept of outperformance cannot be viewed in isolation. One must also consider the volatility associated with the performance. Both West San Francisco and the South of Market submarket frequently oscillate between extremes. On the other hand, Downtown San Francisco tends to be more stable and usually outperforms the metro average.
The second key concept is momentum. The best example of this is Central San Mateo County. From 2004 to 2008, the submarket was stuck in a downward trend. But after hitting a trough in 2008, the submarket has shown consistent strength. As a result, Central San Mateo County moved into the market leading position in terms of annual revenue growth in 2013.
Third, it conveys the cyclical nature of real estate performance. By our definition, annual revenue change is derived by combining the occupancy change and the same-store rent change. The chart below illustrates the range of performance and percentage spread between submarkets. What is telling, even in a high performing metro like San Francisco, the difference between the best performing and worst performing submarkets was 9.2 percentage points in 2013. Furthermore, the historical range and spread have important buy/sell, strategic and pricing implications for investors. For example, in periods of weakness – when apartment occupancy tends to be lower – there is a widening divergence of performance between best and worst, so spreads widen. In times like these, a flight to quality strategy historically produces better returns as these areas tend to recover sooner than less desirable areas. On the flip side, in times of strength – when apartment occupancy is tight across the board – the range of performance narrows and spreads compress. In times like these, a rising tide can lift all boats, indicating the momentum and value-add opportunities (especially in desirable submarkets) tend to shine.
This concept of an Ibbotson chart is not meant to provide investment advice. Rather, it should provide a meaningful visual based on historical performance so that, as investors, we never rest on our laurels, and instead, proactively anticipate change. Where you should invest certainly depends on your investment strategy, return objectives and risk tolerance. Use this Ibbotson chart analysis as another data point – one that helps you to build the best case for a smart investment strategy in a powerful visual format.
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