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Synthetic cap rate indices (1991-Covid era)

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  • Christopoulos, Andreas D.
  • Barratt, Joshua G.
  • Ilut, Daniel C.

Abstract

We introduce a method that combines Euclidean distancing and OLS techniques to project synthetic capitalization rate indices (‘SCXs’) for metropolitan statistical areas in the US. SCXs are projected independently of market prices, asset specific characteristics and geographic location (ex-ante). In contrast to market cap rates, driven by geographic proximity and market comparables, our new method is driven by economic proximity. We find SCXs provide better forward guidance than market cap rates for commercial real estate (‘CRE’) defaults and CRE values before and during the Covid pandemic. Our method establishes CRE benchmark cap rate indices across property types that explicitly connect CRE valuation at the MSA level to macroeconomic indicators through economic proximity.

Suggested Citation

  • Christopoulos, Andreas D. & Barratt, Joshua G. & Ilut, Daniel C., 2024. "Synthetic cap rate indices (1991-Covid era)," Global Finance Journal, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:glofin:v:60:y:2024:i:c:s1044028324000334
    DOI: 10.1016/j.gfj.2024.100961
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    More about this item

    Keywords

    Cap rates; Credit risk; Fair value; Indexing; Information content; Macroeconomics; Real estate;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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