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The Capitalization Rate of Commercial Properties and Market Returns

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    Abstract

    This study develops a model of real estate cap rates that draws on the weighted average cost of capital (WACC) theory and the capital asset pricing model (CAPM) in the finance literature. The model indicates cap rates are determined by debt and equity spreads. The debt spread is the risky debt rate less the risk-free rate, and the equity spread is the return on the market less the risk-free rate. The empirical results support the importance of both spreads; however, cap rates respond with significant adjustment lags to changes in capital market spreads. Our findings support the widely held belief that real estate markets are information inefficient and segmented from the national capital market.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol10n05/v10p509.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 10 (1995)
    Issue (Month): 5 ()
    Pages: 509-518

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    Handle: RePEc:jre:issued:v:10:n:5:1995:p:509-518

    Contact details of provider:
    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Web page: http://www.aresnet.org/

    Order Information:
    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    References

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    1. Jeffrey D. Fisher & George H. Lentz, 1986. "Tax Reform and the Value of Real Estate Income Property," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(2), pages 287-315.
    2. Terry V. Grissom & David Hartzell & Crocker H. Liu, 1987. "An Approach to Industrial Real Estate Market Segmentation and Valuation Using the Arbitrage Pricing Paradigm," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(3), pages 199-219.
    3. Brent W. Ambrose & Hugh O. Nourse, 1993. "Factors Influencing Capitalization Rates," Journal of Real Estate Research, American Real Estate Society, vol. 8(2), pages 221-238.
    4. Ko Wang & Terry V. Grissom & Su Han Chan, 1990. "The Functional Relationships and Use of Going-In and Going-Out Capitalization Rates," Journal of Real Estate Research, American Real Estate Society, vol. 5(2), pages 231-246.
    5. Richard D. Evans, 1990. "A Transfer Function Analysis of Real Estate Capitalization Rates," Journal of Real Estate Research, American Real Estate Society, vol. 5(3), pages 371-380.
    6. Ricks, R Bruce, 1969. "Imputed Equity Returns on Real Estate Financed with Life Insurance Company Loans," Journal of Finance, American Finance Association, vol. 24(5), pages 921-37, December.
    7. Karl L. Guntermann & Richard L. Smith, 1987. "Derivation of Cost of Capital and Equity Rates from Market Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(2), pages 98-109.
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    Cited by:
    1. Doina Chichernea & Norm Miller & Jeff Fisher & Bob White & Michael Sklarz, 2008. "ACross-Sectional Analysis of CapRates by MSA," Journal of Real Estate Research, American Real Estate Society, vol. 30(3), pages 249-292.
    2. Patric H. Hendershott & Bryan D. MacGregor, 2005. "Investor Rationality: Evidence from U.K. Property Capitalization Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(2), pages 299-322, 06.
    3. John McDonald & Sofia Dermisi, 2009. "Office Building Capitalization Rates: The Case of Downtown Chicago," The Journal of Real Estate Finance and Economics, Springer, vol. 39(4), pages 472-485, November.

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