Office Building Capitalization Rates: The Case of Downtown Chicago

Posted: 10 Aug 2009

See all articles by John F. McDonald

John F. McDonald

University of Illinois at Chicago

Sofia Dermisi

Roosevelt University - Walter E. Heller College of Business Administration - Department of Finance & Real Estate

Date Written: August 6, 2009

Abstract

This paper is an empirical study of the capitalization rates for 132 office building sales in downtown Chicago from 1996 to 2007. The capitalization rate is hypothesized to be a function of the classic capital asset pricing model variable and variables intended to capture the expectation that the real market value of the building will change. The results show that the capitalization rate for office buildings incorporates a very low value for "beta." A lower capitalization rate was associated with a smaller risk-free rate, a lower borrowing rate, class A buildings, newer buildings, buildings that had been renovated, a reduction in the vacancy rate in the downtown Chicago office market, and an increase in employment in the financial sector of the metropolitan area.

Keywords: office capitalization rates, office asset markets

Suggested Citation

McDonald, John F. and Dermisi, Sofia, Office Building Capitalization Rates: The Case of Downtown Chicago (August 6, 2009). Journal of Real Estate Finance and Economics, Vol. 39, No. 4, 2009, Available at SSRN: https://ssrn.com/abstract=1444845

John F. McDonald (Contact Author)

University of Illinois at Chicago ( email )

Chicago, IL 60605
United States
312-281-3287 (Phone)
312-281-3123 (Fax)

Sofia Dermisi

Roosevelt University - Walter E. Heller College of Business Administration - Department of Finance & Real Estate ( email )

Chicago, IL 60605
United States
(312) 281-3355 (Phone)
(312) 281-3290 (Fax)

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