An in-depth analysis of 1,086 real estate portfolios from the first quarter of 1999 through the first quarter of 2025 has revealed that asset selection was the primary driver of performance differences across portfolios. According to the study, asset selection accounted for an average of 67% of the variance between individual portfolio returns and country-level benchmarks, indicating that decisions about specific properties consistently had a greater impact on returns than broader allocations by property type or geography. However, this dynamic began to shift around 2015 as the performance gap between property types widened. Industrial real estate began to significantly outperform other sectors, while retail and office assets struggled, leading to a temporary decline in the influence of asset selection. Between 2020 and 2022, sector allocation became increasingly important, particularly in the U.K. and U.S. markets, where asset selection contributed to less than half of overall tracking error in portfolios. Since the onset of the post-pandemic market correction, however, the trend appears to be reversing. The dispersion of returns among individual assets within the same sector or region has widened, reaffirming the role of asset selection in driving performance. In this more volatile environment, the unique characteristics of each asset—such as quality, location, and income potential—have become increasingly important. For institutional investors and asset managers, the findings suggest that portfolio construction must strike a balance between top-down allocation strategies and detailed, bottom-up asset analysis. In times of economic dislocation and correction, performance is increasingly tied to the ability to identify and manage assets that can maintain occupancy, drive rental income, and preserve or enhance value. The study’s results highlight that, while market conditions can temporarily elevate the importance of broader allocation decisions, long-term performance remains strongly tied to the selection and management of individual properties. Source: MSCI