Abstract
Executive Summary. Some investors believe real estate has become overpriced because cap rates seem numerically low when compared with historical rates. Cap rates do not, by themselves, signal an over- or under-priced market, or a cyclical or secular trend. One needs to look at the connections between the capital markets and the real estate markets, and to look at the relative investment environment as captured by cap rate spreads—a good measure of the real estate risk premium. This paper presents an analysis of the interactions between the capital markets and property market fundamentals that drive asset pricing. The findings indicate that real estate in most property types still looks reasonably priced.
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