Creating Commercial Real Estate Alpha via NREI Readers Write

In modern portfolio theory, Alpha is the excess return of an investment above the market or benchmark return. In the capital markets, Alpha is the excess return of common stocks above a benchmark like the S&P 500 Index or the excess return of a portfolio of REIT stocks above the FTSE NAREIT Index.

In CRE, Alpha is the excess return generated by the investment owner/manager above the market return like the NCREIF NPI Index (see the June 15, 2012 VOM for current returns). The Alpha return in CRE as opposed to stocks and bonds is primarily generated by the investment owner/manager through its control of the real estate asset. This hands-on control of the real estate asset, leases, income/expenses and capital structure enables the owner/manager to generate Alpha return.

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