Joseph L. Pagliari

A Technical Note: When Are the Risks of Leverage Offset by Diversification? Almost Never
Date Posted:Wed, 31 Jan 2024 21:39:02 -0600
The focus of this technical note is meant to narrowly address a question often raised by investors, operators and sponsors: Can the additional risks created by the use of leverage be completely offset by the diversification benefits of a greater number of assets in the portfolio? No, not under the narrow considerations set forth in this monograph.

Another Take on Real Estate's Role in Mixed-Asset Portfolio Allocations
Date Posted:Tue, 21 Feb 2023 14:20:58 -0600
This paper examines real estate?s role in institutional mixed-asset portfolios using both private- and public-real estate indices, as a means of examining varying real estate-related risk/return opportunities. In so doing, this paper also examines the effects of: 1) increasing the investment horizon, 2) placing constraints on the maximum allocation to any one asset class, and 3) varying the risk preferences of investors. The empirical results suggest ? using infinite-horizon returns and all of the caveats that accompany such a perspective ? that real estate allocations of approximately 10-15% of the mixed-asset portfolio represent an upper bound for most investors. For those investors preferring low-risk portfolios, (unlevered) private real estate is the vehicle serving this allocation preference; for those investors preferring high-risk portfolios, public real estate (with its embedded leverage of 40-50%) is the vehicle serving this allocation preference ? with such vehicles serving as substitutes for a variety of non-core real estate strategies. In some sense, the distinction between private and public real estate is more about the use of leverage. For those investors preferring moderate-risk portfolios, an intermediate-leverage approach seems optimal.

Real Estate Returns by Strategy: Have Value-Added and Opportunistic Funds Pulled Their Weight?
Date Posted:Tue, 21 Feb 2023 13:49:11 -0600
Real estate strategies broadly fall into three categories: core, value-added and opportunistic. This empirical examination of net returns from these three strategies indicates that, on a risk-adjusted basis, the value-add funds have strongly underperformed and the returns from opportunistic funds have weakly underperformed the returns available from core funds. In so concluding, this article departs from standard asset-pricing models in two important respects: the total risk is used and the cost of borrowing increases as leverage increases. While the first departure has no substantive effect, the second departure lowers the estimate of the underperformance of non-core funds.

Thoughts on the Looming Pension Problems Facing Chicago, Cook County and Illinois
Date Posted:Fri, 24 Apr 2020 16:33:31 -0500
Recent increases in Cook County?s property taxes have reignited longstanding political controversies about public-sector expenditures of the City of Chicago, Cook County and the State of Illinois. These fiscal problems leave Illinois with among the worst fiscal health of any of the fifty states. Much of the state?s poor fiscal condition is attributable to the unfunded pension liabilities of its various governmental entities. These liabilities have an adverse impact on property values (due to increased property taxes, uncertainty about how these unfunded pension liabilities are to be ultimately resolved, and the crowding out of public-sector services). Partly as a result of these harmful forces, the Chicago area has seen the lowest home appreciation rate of any major metropolitan area in the country. Importantly, these fiscal problems are expected to worsen, as the gap between the pension plans? assets and liabilities is expected to widen considerably over the coming decades. Moreover, it is challenging to raise taxes in an environment where Illinois? overall taxes are the third-highest in the country (and, specifically, its property taxes are the second-highest in the country and its sales taxes are the seventh-highest in the country). Without a comprehensive plan to arrest these runaway pension liabilities, the economic engine that is the Chicago metropolitan area will slowly falter. Now that the Democrats control the governorship as well as both legislative bodies, it would

New: Thoughts on the Looming Pension Problems Facing Chicago, Cook County and Illinois
Date Posted:Fri, 24 Apr 2020 07:33:41 -0500
Recent increases in Cook County’s property taxes have reignited longstanding political controversies about public-sector expenditures of the City of Chicago, Cook County and the State of Illinois. These fiscal problems leave Illinois with among the worst fiscal health of any of the fifty states. Much of the state’s poor fiscal condition is attributable to the unfunded pension liabilities of its various governmental entities. These liabilities have an adverse impact on property values (due to increased property taxes, uncertainty about how these unfunded pension liabilities are to be ultimately resolved, and the crowding out of public-sector services). Partly as a result of these harmful forces, the Chicago area has seen the lowest home appreciation rate of any major metropolitan area in the country. Importantly, these fiscal problems are expected to worsen, as the gap between the pension plans’ assets and liabilities is expected to widen considerably over the coming decades. ...

New: Long-Run Investment Horizons and Implications for Mixed-Asset Portfolio Allocations
Date Posted:Sun, 04 Sep 2011 11:01:53 -0500
When different asset classes display varying degrees of serial correlation, the investment horizon may substantially alter optimized mixed-asset portfolio allocations. Private-market assets (such as commercial real estate and private equity) often display much higher levels of autocorrelation than their public-market counterparts. Consequently, the one-year returns typically used in mixed-asset portfolio optimization procedures often generate excessive allocations to private-market asset ...

Long-Run Investment Horizons and Implications for Mixed-Asset Portfolio Allocations
Date Posted:Sun, 04 Sep 2011 00:00:00 -0500
When different asset classes display varying degrees of serial correlation, the investment horizon may substantially alter optimized mixed-asset portfolio allocations. Private-market assets (such as commercial real estate and private equity) often display much higher levels of autocorrelation than their public-market counterparts. Consequently, the one-year returns typically used in mixed-asset portfolio optimization procedures often generate excessive allocations to private-market asset classes. To counteract these excessive loadings, many researchers and practitioners advocate either ad hoc rules designed to constrain the maximum allocation to private-market vehicles and/or the use of some de-smoothing procedure to inject additional volatility in the observed return series. This paper takes a different approach by examining the three components in the standard portfolio optimization technique as the investment horizon lengthens; the auto-correlated nature of the observed returns of private-market assets implies that (annualized) long-horizon volatility decays less slowly ? as compared to those public-market asset classes exhibiting the random walk ? and long-horizon correlation (with most public-market alternatives) increases. In re-running the mixed-asset portfolio optimization with long-horizon returns, the allocations to commercial real estate ? as one example of private-market assets ? are much reduced and more consistent with allocation levels generally found in large

Twenty Years of the Ncreif Property Index
Date Posted:Tue, 08 Sep 1998 23:06:49 -0500
This study overviews the performance of the NCREIF Property Index, by property type, over its initial twenty-year period. As a precursor to more exact analytical methods, the study displays the path of earnings, cash flow and property values over this twenty-year period. More exactly, the performance is analyzed from the perspective of the "fundamental" sources of return: initial earnings yield, "dividend" pay-out ratios, earnings growth, shifts in capitalization rates and other (less significant) effects. (While this approach has been applied to private real estate equities, nothing precludes its application to variety of other investment classes.) Our results indicate the fundamental sources that have contributed to the Index's considerable cross-sectional variation as well as its time-series variation. As such, this study should be viewed as a useful historical account for those interested in understanding the ex post return-generating process of the Index and its property-type components as well as those who wish to model the ex ante return-generating process for a variety of applications in both the equity and debt markets, regardless of whether the securities are publicly or privately traded.

Twenty Years of the NCREIF Property Index
Date Posted:Tue, 08 Sep 1998 14:06:49 -0500
This study overviews the performance of the NCREIF Property Index, by property type, over its initial twenty-year period. As a precursor to more exact analytical methods, the study displays the path of earnings, cash flow and property values over this twenty-year period. More exactly, the performance is analyzed from the perspective of the "fundamental" sources of return: initial earnings yield, "dividend" pay-out ratios, earnings growth, shifts in capitalization rates and other (less ...

On Setting Apartment Rental Rates: A Regression-Based Approach
Date Posted:Wed, 26 Nov 1997 07:32:53 -0600
This study presents a regression-based analysis of apartment rents for a crosssection of properties located in an "edge city" submarket. It attempts to provide a solution for owners and managers of apartments to the thorny problem of setting a property's rental rate. The approach used in this analysis differs from previous studies in at least three important respects: (1) vacancy is treated as part of the dependent variable, (2) the property-specific rental rate generated by the regression ...

On Setting Apartment Rental Rates: A Regression-Based Approach
Date Posted:Fri, 01 Aug 1997 00:00:00 -0500
This study presents a regression-based analysis of apartment rents for a crosssection of properties located in an "edge city" submarket. It attempts to provide a solution for owners and managers of apartments to the thorny problem of setting a property's rental rate. The approach used in this analysis differs from previous studies in at least three important respects: (1) vacancy is treated as part of the dependent variable, (2) the property-specific rental rate generated by the regression analysis is compared to the property's actual effective rent, and (3) each property in the submarket is ranked by the difference between its actual effective rent and its characteristic-adjusted effective rent. This is then followed by several observations concerning the advantages and disadvantages of such an analysis in a practical setting.