The Capitalization Rate of Commercial Properties and Market Returns

G. Donald Jud () and Daniel T. Winkler ()
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G. Donald Jud: Finance Department Bryan School of Business and Economics University of North Carolina, Greensboro Greensboro, North Carolina 27412-5001, http://www.uncg.edu/bae/
Daniel T. Winkler: Finance Department Bryan School of Business and Economics University of North Carolina, Greensboro Greensboro, North Carolina 27412-5001, http://www.uncg.edu/bae/

Journal of Real Estate Research, 1995, vol. 10, issue 5, pages 509-518

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.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 1995
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