Clustering Can Diversify a Real-Estate Portfolio
REAL-ESTATE INVESTORS may want to consider "clustering."</br></br>That's one of the ideas being proposed in a new report by Prudential Real Estate Investors, the real-estate investment and advisory business of Prudential Financial Inc. The report aims to provide guidance on how to diversify a commercial real-estate portfolio more effectively.</br></br>Conventional wisdom in the real-estate industry has been that diversification simply means having property in as many markets as possible or in every region. That way, when one market underperforms, it is offset by another market that is doing well.</br></br>Prudential Real Estate Investors offers an alternative way of thinking about diversification -- one that isn't new but is gaining more mainstream acceptance. It proposes grouping the nation's 35 major metropolitan areas into clusters. Economic characteristics, geographic proximity and size all play a role in the clustering, with a strong focus on what the different markets share in common. Markets that have similar industries, for instance, are lumped into clusters rather than regions. The theory is that clustering and limiting investing to a few markets within a cluster reduces risk and redundancy in a portfolio.</br></br>Investors could decide, for instance, that instead of being in Boston, San Francisco, Raleigh, N.C., and Austin, Texas, which are all tech-heavy markets, they can be in just two of those markets and that will be enough tech exposure.