Abstract
Returns for commercial real estate are determined by the interaction between the for or space market and the for or capital market. In the market, tenants lease and short run rental rates are determined by the supply and demand for space. Discount and capitalization (cap) rates for rental real estate are determined in the where real estate competes with other investment alternatives for capital. Uncertainty as to what rental rates and the resulting net operating income (NOI) will be for a property affect risk premiums that are included in the discount rate (See Fisher, Hudson-Wilson and Wurtzebach, 1993; and Fisher, 1992). The tends to be local in nature as supply and demand for can vary considerably across locations. The tends to be more national and little variation in discount rates from location to location (although capitalization (cap) rates will vary due to differences in expected growth in NOI).
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