Real Estate Liquidity vs. Returns

Is the Real Estate Market Capturing Shifting Market Demand?

Liquidity Bull Market Liquidity Bear Market

Background Information

What is liquidity? It is the ease at which an asset can be converted into cash. Research by Dorinth van Dijk and Marc Francke at MIT’s Center for Real Estate model real estate liquidity and correlate it to returns for 25 markets across the United States. They define liquidity as the spread between the reservation prices of the buyer and the seller^1. Their results are fascinating!

Total Returns Across 25 US Markets Liquidity Across 25 US Markets

Correlations Between Liquidity and Returns

Results

The graphs above illustrate the amount of returns and liquidity for the apartment, retail and office sectors across the 25 US markets since 2005. Liquidity is highly correlated, but Returns are much less correlated.

What This Means

Returns are less efficient because of the difficulty to accurately predict the demand and supply curve for real estate in real time. SquareFeet.ai quantifies the demand and supply curve for your real estate asset enabling you to capture the upside when market liquidity rises.

Source: Dijk, Dorinth W. van, and Marc K. Francke. “Commonalities in Private Commercial Real Estate Market Liquidity and Price Index Returns: International Evidence.” MIT Real Estate Price Dynamics, 2020