Principal Financial Group
The addition of commercial mortgages to a diversified investment portfolio can be an effective way to enhance returns or reduce risk. The exact impact depends on the phase of the real estate cycle. This article uses an efficient frontier to analyze the expected return and level of risk commercial mortgages will provide for the portfolio during each phase of the real estate cycle. During the contraction and recession phases commercial mortgages can be used to enhance expected returns. Conversely, during the recovery and expansion phases commercial mortgages can be used to lower the level of expected risk. An investment strategy utilizing commercial mortgages will be driven by the required expected return, risk tolerance of the investor, and perception of which phase of the real estate cycle is currently occurring.