Journal of Real Estate Finance and Economics, 4:367-373 (1991) 1991 Kluwer Academic Publishers Market Conditions, Risk, and Real Estate Portfolio Returns: Some Empirical Evidence JOHN L. GLASCOCK Department of Finance, College of Business Administration, Louisiana State University, Baton Rouge, LA 70803 Abstract This research examinedthe return behavior of a portfolio of American and New YorkStock Exchange real estate firms. A dummy variableprocedure was used to test for excessreturn and/or change in risk behavior across market conditions. The findings were as follows.First, no excess return was found for any model specification. Second, no changes in beta were found using the benchmark approach. The beta shifted when an up market was defined as a nonrecessionary period; the beta behaved procyclically.However, the subperiod tests indicated that effect was transitory and period specific. Key words: Real estate returns, REITs, Market conditions 1. Introduction A key issue in real estate research is whether real estate firms earn abnormal returns. Much prior research has concluded that real estate earns abnormal returns and thus is under- represented in investment portfolios. For example, the work of Brneggeman, Chen, and Thobodeau (1984), Ibbotson and Seigel (1984), Hartzell, Hekman, and Miles (1987), Kuhle, Walther, and Wurtzeback (1986), and Kuhle (1987) has shown that real estate either earned excessive returns or provided a good hedge against inflation. In a review of the real estate return literature, Sirmans and Sirmans (1987) indicated that over half of the real estate research found real estate returns higher than the stocks, bonds, or other assets. One difficulty with many previous efforts was the use of appraisal values for the ap- preciation component of returns. For example, the work of Brueggeman, Chen, and Thibodeau, as well as Ibbotson and Seigel, involved appraisal data. Firstenberg, Ross, and Zisler (1989), Geltner (1989), and Giliberto (1988) have shown that the appraisal process may overestimate or underestimate appreciation for a particular period. The asset price variance may also be understated. Recently, researchers have begun to use exchange traded firms to analyze real estate returns and performance. For example, Allen and Sirmans (1987) examined real estate investment trusts (REITs) acquiring REITS; Howe and Shilling (1990) examined REIT advisor performance; and Chan, Hendershott, and Sanders (1990) examined equity REIT returns. This research complements prior research by concentrating on exchange-listed firms, since much of the prior research has concentrated on nonlisted firms' performance. The