A Cross-Sectional Analysis of Cap Rates by MSA
44 Pages Posted: 23 Jan 2008 Last revised: 9 Dec 2008
Abstract
Much attention has been paid to capitalization rates or cap rates defined as the net operating income over transaction price, also known as a going-in current yield on commercial real estate when calculated at the time of purchase. There are a number of global factors that drive capital markets and required rates of return that help to explain observed cap rates over time, but little is known about the factors driving the geographical cross-sectional variation of these cap rates. This paper uses data from Real Capital Analytics for multifamily properties to explore several models that combine the expected influences from housing demand growth, supply constraints, liquidity risk, and the interaction of these. The findings reveal that there is a very strong and robust relation between supply constraints and cap rates, as well as evidence of capital flowing from larger markets to smaller markets in recent years. The findings also reveal weak but generally supportive evidence of influences from expected growth rates, liquidity, and other risk factors.
Keywords: Multifamily properties, cap rates, housing demand
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