Property Size and Risk: Why Bigger is Not Always Better

Executive Summary.This study investigates the relationship between property size and risk-return profile. Conventional wisdom has suggested that large (or trophy) properties are more stable due to a number of factors. For example, these properties are likely to have, among other things, a greater proportion of credit tenants, the locational advantage of being in highly populated urban centers, and a premium associated with their trophy status. We analyzed the performance of four property size classes—below $20 million; $20-40 million; $40-$100 and over $100 million—across the 1981-1998 period and within the four imbedded phases of the real estate cycle. Results indicate that property size is a powerful moderator of risk / return across the spectrum of size, and that the largest category of property ($100 million and over), while providing investors with the highest average return, also exhibits the greatest volatility.