Intrametropolitan Spatial Diversification

Executive Summary. This study investigates the possibility of intrametropolitan geographic diversification. Four metropolitan areas, Atlanta, Boston, Chicago, and Dallas were selected for investigation. The vacancy rates of both office and industrial space in all submarkets of the four metropolitan areas are used as a proxy for asset performance. An ANOVA technique is employed to test the homogeneity of asset performance and identify the homogeneous groups of submarkets within each metropolitan area. The correlation coefficients of these homogeneous groups are then calculated to see whether low or negative correlations of asset performance exist among these groups. The results indicate that the asset performances within metropolitan areas are highly heterogeneous, and low or negative correlations exist among most submarkets or groups of submarkets. The findings imply that (1) portfolio risk can be reduced by diversification across submarkets within metropolitan areas, and (2) viewing metropolitan areas as homogeneous real estate markets may result in misdirected investment strategy, and the location impact imposed by submarkets should be recognized and properly analyzed.