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| Author: | Ghysels, E. Plazzi, A. Valkanov, R. |
| Title: | Valuation in US commercial real estate |
| Journal: | European Financial Management
2007 : JUN, VOL. 13:3, p. 472-497 |
| Index terms: | property return on investment valuation USA |
| Language: | eng |
| Abstract: | This study considers a long-linearized version of a discounted rents model to price commercial real estate as an alternative to traditional hedonic models. The authors verify a key implication of the model, namely, that cap rates forecast commercial real estate returns. This is done by using two different methodologies: time series regressions of 21 US metropolitan areas and mixed data sampling (MIDAS) regressions with aggregate REIT returns. Both approaches confirm that the cap rate is related to fluctuations in future returns. The study also investigates the provenance of the predictability. Based on the model, fluctuations in the cap rate are decomposed into three parts: 1) local state variables (demographic and local economic variables), 2) growth in rents and 3) an orthogonal part. About 30% of the fluctuation in the cap rate is explained by the local state variables and the growth in rents. |
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