Clustering Real Estate
Clustering the U.S. Real Estate Markets article offers a strategy in which the U.S. city areas can be disintegrated based on their economic, geographic, and size features. This paper will provide an analysis of the article and the limitations of the method they used to group the cities. This includes the critique of the article and the proposal of an effective method to develop an investment strategy in real estate markets.
Smith et al. (2005), argues that coming up with an effective investment strategy is difficult due to the huge number of real estate investment in the United States. Grouping the real estate markets into a smaller number would help the managers to rate the performance of the markets through benchmarking. Using size, economic structure, and geographical location, the authors create eight clusters. The clusters are capital metro, New York corridor, tech centers, southern growth, heartland, lifestyle centers, southern California, and opportunistic markets.
When clustering the markets, the process did not consider the internal structures and the working of each market. The analysts used the general knowledge provided from the indexes of the markets. Clustering the real estate markets is not an effective way to develop investment strategies (Donahue et al., 2018). The clustering of the firms has no sufficient information to influence the external and internal capabilities of the markets. Investment strategies may introduce shared actions in clusters without considering the internal structures of each market. Actions may, therefore, not address the challenges that certain markets face within that cluster. An investment strategy needs to prioritize clusters or markets that have the highest growth potential, and they align with the needs of the region. This would be better than intervening in clusters connected by regional similarities.
In conclusion, Smith et al. (2005) effectively grouped the city markets. Still, clustering the united states real estate markets would not be the most effective and efficient way to develop investment strategies due to limited information on markets making the clusters.
References
Donahue, R., Parilla, J., & McDearman, B. (2018). Rethinking cluster initiatives. Brookings Institution: Washington, DC, USA. https://www.brookings.edu/wp-content/uploads/2018/07/201807_Brookings-Metro_Rethinking-Clusters-Initiatives_Full-report-final.pdf
Smith, A., Hess, R., & Liang, Y. (2005). Point of View Clustering the U.S. Real Estate Markets. Journal of Real Estate Portfolio Management, 11(2), 197-209. https://aresjournals.org/doi/abs/10.5555/repm.11.2.k31687351q322180