Let's look at Nashville. Under a cap-weighted approach, it has a weighting significantly lower than an approach which looks at the productivity and economy output:
Nashville-Davidson--Murfreesboro--Franklin, TN Metro Area
An economic productivity weighted approach would be overweight vs. a cap-weighted approach in Nashville by 41% in the office sector…
… And by 22% in the residential space…
Nashville metro has .65% of large metro area population, so why should it only have .36% of office space?
It has .55% of high income population in America's large metro areas, so again, why only own .36% of office space?
It is underweight in these categories, because even though prices have gone up recently, they are significantly less likely to be in bubble-territory than New York, Boston, San Francisco, and other extremely high priced real estate markets are. Those huge bets on those markets have to come from somewhere, and they come from places in the South and the Midwest. Cap-weighting often pulls money out of the places to which people are moving, and pushes that money into the places those people are leaving.
For a deeper dive on approaches to real estate investing without the pro-bubble biases of cap weighting, click here.