The Determinants of Office Cap Rates: The International Evidence

We examine commercial office cap rates in 89 large cities in 33 developed and developing countries in the 2000-2019 period. We find that cap rates decline throughout the world over this period, reflecting a corresponding decline in the real rate of interest. In the cross-city analysis our most robust findings are that office cap rates are lower in wealthier cities, especially those that are either considered gateway cities or financial centers. In addition, cap rates tend to be higher in countries with lower credit ratings and higher inflation rates. We find that cap rates in suburban office markets are higher than in central business districts, and for a given metropolis, suburban cap rates are lower in suburbs with better public transport connections to the central business district. Finally, evidence from regressions with city fixed effects reveal that cap rates rise as the discount rate and vacancy rates increase and fall as cities get wealthier.