The Impact of 9/11 on US REIT Returns: Fundamental or Financial?

Following the attack on the World Trade Center on 9/11 volatility of daily returns of the US stock market rose sharply. This increase in volatility may reflect fundamental changes in the economic determinants of prices such as expected earnings, interest rates, real growth and inflation. In particular, Baen (2003) argues that the terrorist attack added another dimension to property investment risk in the US and as such has serious implications for the future value and net operating income (NOI) to institutional, investment-grade real estate. Alternatively, the increase in volatility may simply reflect the effects of increased uncertainty in the financial markets. This study therefore sets out to determine if the effects of the attack on the World Trade Center on 9/11 had a fundamental or purely financial impact on US Real estate Investment Trust (REIT) returns. In order to do this we compare pre- and post-9/11 crisis returns for a number of US REIT indexes using an approach suggested by French and Roll (1986), as extended by Seiler et al (2002). In general we find little evidence that the effects of 9/11 had a fundamental effect on REIT returns. In other words, we find that the effect of the attack on the World Trade Center on 9/11 had only a financial effect on the REIT returns and therefore transitory.