Abstract
The properties of income-to-price ratios in asset markets have potentially far reaching implications for understanding investor behavior. Prevailing levels of commercial real estate (CRE) capitalization rates, similar to price/earnings ratios for stocks and owner equivalent rent-to-price relatives for houses, may foretell future investment returns and income growth rates. In CRE capitalization rate models, rent growth rates often proxy for the net operating income (NOI) growth rates. Empirical studies of capitalization rate predictive powers produce inconsistent results that may be due either to the use of these rent growth proxies, model misspecification, or both. We use a novel approach for generating NOI growth rate estimates that involves combining survey rent and the expense growth rates for U.S. apartments. Our GARCH analysis of the capitalization rate spread process using the estimated NOI growth rate produces theoretically consistent results. Importantly, we demonstrate efficiency gains from using our NOI growth rate estimates relative to traditional rent growth rate.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.