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Real estate in United States is one of the largest markets in the world. In fact, it is so significant to world
economic activity that the availability of easy money and the subsequent Housing Bubble triggered the Sub-
Prime Crisis and eventually the global Financial Crisis of 2008 - 2009 that brought the world's economy to its
knees. The US real estate market is divided into 2 sectors: commercial real estate and residential real estate.
Most discussion tends to focus on residential real estate (i.e. houses), but commercial real estate is also a
critical sector of the economy, and is made up of offices, shopping malls, factories, warehouses and other
commercial buildings.

In order to be successful in real estate investment, an investor needs to understand house price trends, assess
the condition and value of the investment property, and secure a suitable mortgage or other form of real
estate finance. The US real estate industry has been experiencing wonderful growth due to the relatively
steady good economy. In 2006, some markets had major gains in occupied space, others saw record sales
transactions. The market has begun to tighten, developers remained cautious possibly eye toward the future,
particularly predictions of escalating rental rates.

Major Participants in the Real Estate Industry

Development is an idea that comes to fruition when consumers – tenants or owner- occupants acquire
and use the space put in place by the development team. Land, labor, capital management and
entrepreneurship are needed to transform an idea into reality. Developers balance the needs of diverse
providers and consumers of the real estate product. The developers have to demonstrate the project's
feasibility to the capital markets and pay interest or assign Equity positions in return for funding.

Appraisers can be a part of every stage of the property development process. Appraisers are primarily
responsible for valuation of the project. They estimate the market value of the property and typically prepare
a formal document called appraisal. Appraisal may be necessary when a developer transfers ownership, seeks
financing and credit, resolves tax matters, and establishes just compensation in condemnation proceedings.
Appraisers can also evaluate a project as input to market studies and feasibility studies. Some of the familiar
names in the US Real Estate markets include CB Richard Ellis, Cushman and Wakefield and Grubb and

Property managers
Property managers focus on the day operation of the asset. Property managers carry responsibility for
all respects of the physical space in accordance with the asset manager's plan. The responsibilities of a
property manager include:
• Marketing and leasing
• Maintenance and repair
• Tenant relations including rent collection
• Insurance
• Accounting
• Human resource management
• Providing timely information to the asset manager about events affecting the property.
Some of the major property managers include Trammel Crow Company and Grubb and Ellis Company.

Brokers/ Leasing Agents

Real Estate brokers and leasing agents are hired to act in the name of the developer or asset manager
in leasing and selling space to prospective tenants or buyers. Their function, particularly in leasing large
industrial and commercial spaces is to carry out one of the most complex financial negotiations in the
development process. Leasing agents must balance all the various uses' individual needs against the
developer's financial model.

A) Construction Lenders are usually commercial banks, which are responsible for financial during
project construction and for seeing that the developer completes the project within the budget and according
to the specifications.

B) Permanent lenders seek to originate safe loans generating the maximum possible return. The
market value of the completed project is very critical in that it serves as the primary collateral for the loan.

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Vision & Mission

The May 2007 realignment of the Company’s services under the Zenta brand reflects the new corporate
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Zenta’s executive, client facing and management teams are based in the U.S. and are comprised of leaders
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Property valuation forms the basis of real estate inventory decision making. Property valuation is
done not only at the time of making the inventory decision, but throughout the period of ownership of the
asset. Decisions are also made periodically about rehabilitation, modernization, expansion, conversion of the
property to another use, demolition of the existing improvements and ever abandoning the asset.

The purpose of this study is to facilitate the company to value the property in various states of US
Real Estate market using the capitalization rate which in turn enables the company to analyse and
recommend investment strategies for clients such as lending institution, bankers or owners etc through a risk
return analysis of the income streams of different commercial and Real estate properties.
• The project seeks to study the various factors to be considered while estimating the capitalization rate.
• To understand the most relevant and reliable methodology for income producing properties.
• To conclude a market value for some subject property in US real estate market.

• To scrutinize the vital factors which affects the capitalization rate of the property and to find out the
importance of each factor.

• To study the impact of property type in determining capitalization rate.
• To determine the effect of location in Real estate market.


• The study is limited only to real estate market in certain states in U.S.A
• The study is restricted only to vital factors which affect the capitalization rate.
• Only secondary data has been used in the study.

Description study method is chosen for the study because of the vast amount of data available in
different books, magazine and websites relating to US real estate. The focussed study of the data can give
good insight into factors influencing capitalization rate.

For the purpose of the study, secondary data was collected through,
 The materials available about US real estate in various websites like realestatejournal.com,
realtyrates.com, bloomberg.com.
 The materials maintained in the organization about the properties.
 Research publication of other institutes and organization like REIS, PULASKI, CBRE.

Sirmans and Webb (1978, 1980) and Ricks (1969) used the ACLI data source. They estimated
imputed equity yields on the investments by hypothesizing average holding periods with no price
appreciation and imputing tax rates. They relate the yield and its variance to alternative investments by using
only the cap rate.

Nourse (1987) uses the REIS data source to estimate the impact of change in capitalization rate for
real estate. His model, however does not take into account the potential variation driven by property types.

Evans (1990) used ACLI data source to estimate the time-series properties for capitalization rates. His
study focuses on comparing the stochastic nature of the stock market earnings/price ratio with real estate
capitalization rate.

Froland (1987) uses the ACLI data source to explain variation in capitalization rate and the
interaction of those rates with the capital market. Froland finds that the capitalization rate is a function of the
mortgage contract rate, the spread between Treasury bills and bonds and the corporate earning price ratio.
However his study has several significant problems like the impact of variation is not considered does not
specify the relationship between the capitalization rate and the independent variables and the interpretation of
his correlation coefficients is weakened by autocorrelation present in the dataset.

Guntermann and Smith (1987) derived estimates of equity rates and costs of capital for property
REITs, mortgage REITs, and homebuilders/developers. While operating properties and REITs had a before-
tax cost of capital of 16.6%, homebuilders/ developers’ cost of capital was substantially greater at 34.9%.
Their study concluded that the data sources and procedures permit the estimation of cost of capital and equity
rates with satisfactory precision and reliability for the majority of investment or appraisal applications.
Froland (1987) compared cap rate movements with competitive yields in the asset
trading markets using quarterly cap rates for apartments, retail, office, and industrial
properties for the first quarter of 1970 through the second quarter of 1986. He found
particularly strong correlations of the cap rate with mortgage rates, ten-year bond rates, and
the earnings/price ratio. In addition, inflationary expectations as measured by the Treasury
bond-bill spread were inversely related to cap rates. Froland also reported negative
correlations between cap rates and indicators of economic cycles, including capacity
utilization, national vacancy rate, and the percentage change in real GNP. Using a stepwise
regression approach, between 86% and 95% of the variation in cap rates was explained by the
mortgage rate, the eight-quarter bond-bill spread, and the price earnings ratio. Froland’s
empirical results were not bound through a theoretical framework and no tests or corrections
for autocorrelation appeared in the study.

A study by Evans (1990) noted the sensitivity of the multifamily and nonresidential real
estate cap rates to the earnings/price ratio in the stock market. This study of quarterly cap
rates for 1966–1988 reported a strong positive relation of real estate cap rates lagging the
earnings/price ratio by one period. Although short of statistical significance, a somewhat
lesser positive correlation occurred in the same quarter and a negative correlation occurred in
the second quarter. Evans concluded that these results were not consistent with the theory that
real estate markets are information efficient.

Ambrose and Nourse (1993) examined mean quarterly capitalization rates for
commercial/retail, office buildings, commercial services, industrial, and hotel properties for
1966 through 1988. The theoretical base for their study is the traditional WACC model that
has been used so extensively in the finance literature. Their empirical model related cap rates
to a local variable, the spread between long-term and short-term Government bond rates, the
earnings/price ratio of the S&P 500, and debt-to-equity components. The debt-to-equity
components were estimated from the average loan-to value and property mortgage costs.
Using seemingly unrelated regression (SUR), they reported that cap rates were not closely
tied to either the S&P 500 or the bond risk premium spread. Using a cross-sectional/time-
series regression approach, they found that Weighted cost of debt of .98, not significantly
different from one. Also, the return on equity was estimated at 4.85% and was statistically
different from zero. The intercept and slope coefficients were found to vary significantly by
property type; however, the panel data regression did not permit separate slope coefficients
by area.

This study extends previous work by Nourse (1987) by developing a theoretical

model consistent with the WACC and CAPM. Unlike other studies that have used the ACLI
database, this study uses National Real Estate Index panel data for office,
warehouse/distribution, retail, and apartment properties. These data consist of twenty-one
MSAs for fifteen half-year periods starting in the second half of 1985. The empirical model
uses a one factor (location) fixed-effects model with correction for autocorrelation for each
location fixed effect. Consistent with Evans (1990), we include one- and two period lags for
market variables. Also, separate results are reported for each property type, permitting
separate slope estimation for each variable while retaining the benefits of panel data reported
for each property type, permitting separate slope estimation for each variable while retaining
the benefits of panel data.
The capitalization rate in the real estate literature refers to the ratio of Net Operating
Income to property value which is the inverse of the price earnings ratio in the stock market.
This rate has a particularly important role in property valuation, because the income
capitalization method converts the expected income stream from commercial property into an
estimate of asset value by dividing the net operating income stream by the capitalization rate.
Most investors associate movements in cap rates with changes in asset values, e.g., falling
cap rates signal rising property values-changes in income or asset prices (or both) can cause
cap rates to move up or down. This is because there is a positive correlation between the
property income and the asset values, the movements in one variable frequently dilute the cap
rate effects of movements in the other. For example, when rents (income) are rising, property
values also tend to increase, such that both the numerator and denominator of the cap rate
equation increase; and when rents are falling, property values usually fall, although this has
not been the case for the last few years.

A market cap rate is determined by evaluating the financial data of similar properties
which have recently sold in a specific market. It provides a more reliable estimate of value
than a market Gross Rent Multiplier since the cap rate calculation utilizes more of a
property's financial detail. The GRM calculation only considers a property's selling price and
gross rents. The Cap Rate calculation incorporates a property's selling price, gross rents, non
rental income, vacancy amount and operating expenses.

If we have a seller and an interested buyer for particular piece of income producing
property, the seller is trying to get the highest price for the property or sell at the lowest cap
rate possible. The buyer is trying to purchase the property at the lowest price possible which
translates into a higher cap rate. The lower the selling price the higher the cap rate. The
higher the selling price, the lower is the cap rate. In summary, from an investor's or buyer's
perspective, the higher the cap rate, the better. Investors expect a larger return when investing
in high risk income properties.
The Cap rate may vary in different areas of a city for many reasons such as
desirability of location, level of crime and general condition of an area. You would expect
lower capitalization rates in newer or more desirable areas of city and higher cap rates in less
desirable areas to compensate for the added risk. In a real estate market where net operating
incomes are increasing and cap rates are declining over time for a given type of investment
property such as office buildings, values will be generally increasing. If net operating income
is decreasing and capitalization rates are increasing over time in a given market place,
property values will be declining.
The cap rate (R) equals (expected) net operating income NOI1 divided by the value
of the property (V) as follows (Ellwood, 1970),

Net operating income is determined by subtracting vacancy amount and operating

expenses from a property's gross income. Operating expenses includes advertising, insurance,
maintenance, property taxes, property management, repairs, supplies, utilities, etc. Operating
expenses do not include the following Appraisers use the Income Approach, Cost
Replacement and Market Comparison methods to estimate the value of property. The Income
Approach utilizes the theory of Capitalization.

The property value for determining the cap rate is based on the sales price in a
competitive market commonly called the market value. Brueggeman and Fisher (1993) noted
that the cap rate is not an internal rate of return on investment (IRR) because it does not
consider changes in projected future income (or changes in the value of a property over time
because of changes in the income stream). If the income stream is expected to grow at a
constant growth rate (g) into the foreseeable future, Brueggeman and Fisher (1993) show that
the value of a property is estimated as the present value of a perpetual stream of future net
operating income cash flows using discount rate r:

Rearranging equation, the cap rate equals the total required return on the property less the
expected growth rate as given:

The 3 Major determinants of cap rates are,

(1) The Opportunity Cost of Capital (OCC),
(2) Growth Expectations in the property’s future cash flows, and
(3)Risk perceptions and preferences among investors regarding the property
The following table shows the movement of capitalization rate for 1992-2010. These
movements are due to various factors which internally or externally affect the property. There
has been initial increase over the capitalization rate but after 1998, a decline can be noted.

Year 4Q Moving Average

1992 7.00%
1994 6.80%
1996 8.20%
1998 9.00%
2000 9.00%
2002 9.50%
2004 8.00%
2006 9.74%
2008 6.25%
2010 10.00%
Table 2.1 4Q Moving Average of Capitalization rate 1988-2006

Figure 2.2 General Movement of cap rate of 4Q from 1988 – 2006

The capitalization rate differs from property to property. It ranges from high in Retail
property to low in hotel property. The following table provides the capitalization rate for the
various property types from 2005 – 2010.

Property Type 2005 2006 2007 2008 2009 2010

Retail 9.30% 9.00% 9.00% 8.25% 7.50% 7.50%
Office 8.40% 8.75% 8.75% 8.50% 8.00% 7.50%
Multifamily 7.90% 7.60% 7.25% 5.80% 5.50% 6.80%
Industrial 8.70% 8.60% 8.50% 8.25% 7.80% 7.00%
Table 2.2 Cap rate for various property types from 2005 – 2010

Figure 2.3 Capitalization rates from 2005 – 2010


The major determinants of capitalization rates are as follows,

• Property Type
The Property type is the category to which it belongs. The various types of properties
are Retail, Office, Mixed Use, Hotel, Multi-family, Self storage and Industrial

• Location
Location means the state in which the subject property is situated.

• Loan To Value
Loan to value is the portion of the amount borrowed compared to the cost or value of
the property purchased. A higher LTV ratio means higher leverage and thus greater
• Market
Market means a city/region in which the subject property is located and included the
geographic location, economy, employment trends etc. of the region.

• Age of the Property

The age of the property is measured as the time gap between its year built and present

• Mortgage Constant
The relationship between annual mortgage loan requirement and the initial mortgage
loan principal expressed as a decimal or percentage, for level payment mortgage loan.

• Lease Term
Lease term is the term during which the tenant agrees to stay in the property by
entering into a lease agreement with the landlord.

• Interest rate
Interest rate is the percentage of a sum of money charges for its use. It is the return on
an investment.

• Inflation
Inflation is the loss in purchasing power of money and increase in the general price
level. Generally measured by the consumer price index published by Bureau of Labor

• Number of Tenants
Number of tenants occupied in the property is the number of tenants. It may be single
tenant for the office property and multi-tenant for the retail property.

• Debt Service Coverage Ratio

Debt service coverage ratio is the relationship between annual net operating income of
a property and annual debt service of the mortgage loan on property. Lenders and
investors calculate the ratio to assist them in determining the likelihood of the
property generating enough income to pay the mortgage payments. From lenders
view point the higher the ratio the better.

• Net Operating Income

Net operating income is the effective gross income less direct operating costs but
excluding depreciation, amortization and interest expense. It is synonymous with
operating cash flow before debt service.

• Equity Yield rate

Equity yield rate is the rate of return on the equity portion of the investment taking
into account periodic cash flow and proceeds from resale. It considers the timing and
amount of cash flows after annual debt service but not income tax.

• Discount Rate
Discount rate is rate of interest charged by Federal Reserve System to banks who
borrow money from the Federal Reserve. An increase in the rate not only discourages
from borrowing but also serves as a signal to money market that the interest rates are
probably going to increase. Accordingly, interest rates charged by banks to customers
usually increases as a result of increase in discount rate. The term is also used to
explain the compound interest rate used in the approach to value to convert expected
future cash flows into present value.

Descriptive analysis:

Descriptive analysis refers to mathematical methods (such as mean, median, standard

deviation) that summarize and interpret some of the properties of a set of data (sample) but do
not infer the properties of the population from which the sample was drawn. Generally the
measures of central tendency (mean, median and mode) and measures of dispersion such as
standard deviation are the tools used in Descriptive Statistics.

All the above factors that affect the Capitalization Rate are used in the Descriptive Statistics.

Descriptive Statistics
Mean Std. Deviation N

Cap rate 7.47333 .922984 30

Location 8.10 5.683 30

Property Type 1.60 .675 30

Age of the Property 22.87 21.365 30

Interest Rate 5.99000 .342566 30

Inflation 2.86667 .260415% 30

Lease Term 4.10 4.845 30

No of tenant 1.83 .379 30

Discount Date 8.6417 1.38217 30

US Treasury 2.29367 .116929 30

LTV 71.433 7.5324 30

DSCR 1.3353 .28832 30

Mortgage Constant 7.138667 .6568931 30

From this descriptive statistics we can able to identify that there are some deviations in the
variables taken for analysis. Among all the factors Loan to Value (LTV) is the factor which
is highly deviated from its actual mean.


Correlation determines the degree of association between two variables X, Y. A plot

of the observations generally helps to visualize whether the variables are correlated. This plot
is called as Scatter Diagram. If the observations tend to flare out or narrow it may suggest
that the variance over the samples is not constant.

Figure 4.1 Scatter Diagram

The correlation coefficient formula is:

r= n∑xy - ∑x * ∑y

√ (n ∑x2 – (∑x)2) * √ (n ∑y2 – (∑y)2)

The correlation coefficient r, a value between +1 and -1, expresses the degree of
association between X and Y.

In order to scrutinize the vital factors which affect the capitalization rate of the property, in
this study we take Capitalization Rate as a dependent Variable and all the other factors as a
independent variable.

The Output of the correlation analysis is shown in the Table 4.1

Scatter diagram showing between Capitalization rates and other Factors:





0.05 0.06 0.07 0.08 0.09 0.1
Cap Rate

Figure 4.2 Correlation – Capitalization rate and Property type


Quantified Location




0.05 0.06 0.07 0.08 0.09 0.1
Cap Rate

Figure 4.3 Correlation - Capitalization rate and Location



Age of the Property







0.05 0.06 0.07 0.08 0.09 0.1
Cap Rate

Figure 4.4 Correlation – Capitalization rate and Age of the property


Lease Term


0.05 0.06 0.07 0.08 0.09 0.1

Figure 4.5 Correlation – Capitalization rate and Lease term



Interest Rate




0.05 0.06 0.07 0.08 0.09 0.1
Cap Rate

Figure 4.6 Correlation – Capitalization rate and Interest rate







0.05 0.06 0.07 0.08 0.09 0.1
Cap Rate

Figure 4.8 Correlation – Capitalization rate and Inflation



Discount rate






0.05 0.06 0.07 0.08 0.09 0.1

Figure 4.9 Correlation – Capitalization rate and Discount rate

Mortgage Constant








0.05 0.06 0.07 0.08 0.09 0.1

Figure 4.10 Correlation – Capitalization rate and Mortgage Constant











0.05 0.06 0.07 0.08 0.09 0.1
Cap Rate

Figure 4.12 Correlation – Capitalization rate and Loan to Value






0.05 0.06 0.07 0.08 0.09 0.1
Cap Rate

Figure 4.13 Correlation – Capitalization rate and DSCR

In the table 4.1, we can see four factors (Age of the Property, Inflation, Lease Term and
LTV) are negatively related with Capitalization Rate. And the Remaining Factors (Location,
Property Type, Interest Rate, No of Tenant, Discount Rate, DSCR and Mortgage Constant)
are positively related with Capitalization Rate. But seeing the significance level, only four
independent variables (Age of the Property, Interest Rate, Discount Rate and Mortgage
Constant) have significance level below 10%. Remaining Seven independent variables have
significance level more than 10%.
Therefore considering the significance level, only the below mentioned four independent
variables are considered for regression analysis.
• Age of the Property
• Interest Rate
• Discount Rate and
• Mortgage Constant

Multiple linear regressions are used to predict the variance in an interval dependent,
based on linear combinations of independent variables. Multiple regression can establish that
a set of independent variables explains a proportion of the variance in a dependent variable at
a significant level (through a significance test of R2), and can establish the relative predictive
importance of the independent variables. One can test the significance of difference of two
R2's to determine if adding an independent variable to the model helps significantly. Using
hierarchical regression, one can see how most variance in the dependent can be explained by
one or a set of new independent variables, over and above that explained by an earlier set.
The estimates (b coefficients and constant) can be used to construct a prediction equation and
generate predicted scores on a variable for further analysis.

The multiple regression equation takes the form y = b1x1 + b2x2 + ... + bnxn + c. The b's
are the regression coefficients, representing the amount the dependent variable y changes
when the corresponding independent changes one unit. The c is the constant, where the
regression line intercepts the y axis, representing the amount the dependent y will be when all
the independent variables are 0. Associated with multiple regression is R2, multiple
correlation, which is the percent of variance in the dependent variable, explained collectively
by all of the independent variables. Multiple regression shares all the assumptions of
correlation: linearity of relationships, the same level of relationship throughout the range of
the independent variable, interval or near-interval data, absence of outliers, and data whose
range is not truncated. Here,
R2 - coefficient of determination, gives the proportion of the variance of one variable that is
predictable from the other variable.
Standard Error - The standard error of a statistic is the standard deviation of the sampling
distribution of that statistic.

F-Ratio – F-ratio is the test statistic used in analysis of variance to compare the magnitude of
two estimates of the population variance to determine whether the two estimates are
approximately equal.
Significance Level - The probability of a false rejection of the null hypothesis in a statistical
Multiple linear regression analysis was done using SPSS. As discussed earlier only the below
mentioned factors are considered for regression analysyis.
Dependent variable : Capitalization rate
Independent variables : Age of the Property, Interest Rate, Discount Rate and
Mortgage Constant.


Model Summary
Change Statistics
R Adjusted R Std. Error of R Square Sig. F
Model R Square Square the Estimate Change F Change df1 df2 Change
1 .644a .415 .321 .760519% .415 4.428 4 25 .008
a. Predictors: (Constant), Mortgage Constant, Age of the Property, Discount
Date, Interest Rate

R Square = 0.415 (41.5%). The independent variables explain 41.5% of dependent variable
(Capitalization Rate). Significance level is 0.8%

Sum of
Model Squares df Mean Square F Sig.
1 Regression 10.245 4 2.561 4.428 .008a
Residual 14.460 25 .578
Total 24.705 29
a. Predictors: (Constant), Mortgage Constant, Age of the Property, Discount
Date, Interest Rate
b. Dependent Variable: Cap rate

Significance level is 0.008 (0.8%).

A one-way between subjects ANOVA was conducted to know the effect of Receivables and
Payables on Operating profit of the firm. There is a significant effect of cash management on
operating profit of CUMI at the 5% level of significance
Unstandardized d
Coefficients Coefficients Collinearity Statistics
Model B Std. Error Beta t Sig. Tolerance VIF
1 (Constant) 2.298 2.546 .902 .375
Age of the
-.011 .007 -.254 -1.627 .116 .964 1.038
Interest Rate .137 .495 .051 .277 .784 .694 1.442
Discount Rate .338 .108 .506 3.114 .005 .887 1.127
.236 .254 .168 .930 .361 .718 1.393
a. Dependent Variable: Cap rate

F – Table value at 0.05% significance level and degrees of freedom (12, 17) = 2.38
As, the F critical value is less than the F statistic (3.38) obtained, the null hypothesis is
H0: There is no significant relationship between Capitalization rate and other factors.
H1: There is significant relationship between Capitalization rate and other factors.

The figure shows in the regression plot between the Capitalization Rate and predicted
factors of capitalization rate.





Cap Rate 0.075





0.05 0.06 0.07 0.08 0.09 0.1
Predicted Y

Figure 3.26 Capitalization rate and predicted factors of capitalization rate


Capitalization Rate = -0.0250+0.0026 *Quantified Market - 0.0014* Location

+ 0.0001 * Property type + 0.7037* Interest rate + 0.0718* Equity yield + 0.0000 * As is
value + 0.1451 * Inflation +0.0006 * Lease term + 0.2846 * Discount rate – 0.0001 * Age
of property + 0.3117 * Mortgage constant + 0.0000 * NOI- 0.0071 * No of tenant.


The R-Squared statistic indicates that the model as fitted explains 73% of the variability in
Capitalization Rate. The adjusted R-squared statistic, which is more suitable for comparing
models with different numbers of independent variables, is 52% and is also significant. The
standard error of the estimate shows the standard deviation of the residuals to be 0.0064.
Also, ANOVA shows that F value is greater than F critical value and the null hypothesis is
rejected. Thus, there is significant relationship between Capitalization rate and other factors.
Since the P-value in the ANOVA table is less than 0.05, there is a statistically significant
relationship between the variables at the 95.0% confidence level. From the regression line
plot it can be seen that 95% of the predicted values fall in a narrow band. From this we can
say that the regression line is a good fit. Hence the estimating regression equation can be
used to predict the Capitalization Rate.
The following table shows the movement of capitalization rate for the retail property.

S. No Cap rate Appraisal Date US Treasury

1 5.75% 10/1/2010 2.22%
2 6.50% 8/7/2010 2.27%
3 7.50% 10/4/2010 2.20%
4 8.00% 10/20/2010 2.42%
5 9.00% 8/30/2010 2.22%
6 8.50% 9/5/2010 2.26%
7 8.00% 12/29/2010 2.36%
8 7.00% 11/30/2010 2.10%
9 7.50% 1/13/2011 2.44%

Table 4.18 Movement of Cap rate and US Treasury rate - Retail

Figure 4.27 Movement of Cap rate for retail property with respect to US Treasury bill


The following table shows the movement of capitalization rate for the office property.

S. No Cap rate Appraisal Date US Treasury

1 8.00% 9/8/2010 2.29%
2 6.50% 1/1/2011 2.33%
3 7.75% 7/10/2010 2.52%
4 7.88% 5/3/2010 2.49%
5 7.44% 11/20/2010 2.21%
6 7.25% 10/24/2010 2.45%
7 7.50% 1/8/2010 2.03%
Table 4.19 Movement of Cap rate and US Treasury rate - Office
Figure 4.28 Movement of Cap rate for office property with respect to US Treasury bill

The following table shows the movement of capitalization rate for the Multi-family property.

Appraisal US
S. No Cap rate Date Treasury
1 8.35% 8/1/2010 2.38%
2 6.00% 10/1/2010 2.22%
3 7.75% 10/10/2010 2.33%
4 5.25% 11/15/2010 2.18%

Table 4.20 Movement of Cap rate and US Treasury rate – Multi-Family

Figure 4.19 Movement of Cap rate for Multi-Family property with respect to US
Treasury bill

The following table shows the movement of capitalization rate for the industrial property.

Appraisal US
S. No Cap rate Date Treasury
1 8.00% 5/3/2010 2.49%
2 6.50% 1/5/2011 2.33%
3 6.75% 9/15/2010 2.32%

Table 4.21 Movement of Cap rate and US Treasury rate - Industrial

Figure 4.30 Movement of Cap rate for Industrial property with respect to US Treasury

Mixed Use:
The following table shows the movement of capitalization rate for the mixed use property.

Appraisal US
S. No Cap rate Date Treasury
1 6.50% 9/1/2010 2.20%
2 8.00% 12/19/2010 2.29%
3 8.00% 1/1/2011 2.33%

Table 4.22 Movement of Cap rate and US Treasury rate - Retail

Figure 4.31 Movement of Cap rate for retail property with respect to US Treasury bill

Self Storage:
The following table shows the movement of capitalization rate for the self-storage property.

Appraisal US
S. No Cap rate Date Treasury
1 7.75% 11/3/2010 2.29%
2 8.00% 11/13/2010 2.18%

Table 4.23 Movement of Cap rate and US Treasury rate – Self-storage

Figure 4.32 Movement of Cap rate for retail property with respect to US Treasury bill

The following table shows the movement of capitalization rate for the hotel property

Appraisal US
S. No Cap rate Date Treasury
1 8.00% 9/19/2010 2.28%
2 9.28% 11/9/2010 2.18%

Table 4.24 Movement of Cap rate and US Treasury rate - Hotel

Figure 4.33 Movement of Cap rate for retail property with respect to US Treasury bill



By analyzing the various factors affecting the capitalization rate the following were observed:

• It is observed from the 4 quarter moving average that for the past 10 years the
capitalization rates for the properties are showing a downward trend. This means the
value of the properties is continuously increasing.

• Inflation has a moderate effect on the capitalization rate.

• Discount rate, Interest rate, Lease term and Number of tenants are assessed as an
important indicator for determining the capitalization rate.

• Property type, Location and Market is identified as the best indicator while
considering the factors which affect the capitalization rate.

• It is observed that, higher the quality of the property, lower the capitalization rate and
higher the quality of the tenants, lower the capitalization rate.

• As is value and Age of the property have inverse relationship with the capitalization

• It is assessed that higher the demand for the specific types of property, the lower the
Capitalization rate.


• Investors should take into consideration the factors such as Property type, Location
and Market while investing in the Real Estate Market.

• Not only the property type but also the number of tenants in the property should be
considered since single-tenant property is more risky than the property occupied by
multi tenants.

• Investors should take into consideration the per capita income while deciding the
location of the property.
• The investors should consider the lease term while investing in properties as very low
lease term leads to roll over risk and higher cost of tenant improvements.

• The investor must consider the property type as some properties such as hotels are
more risky due to unpredictable occupancy rate.

• The investors can use the regression model developed in this study to estimate the
capitalization rate of the property.



A capitalization rate is simply a ratio of a property’s net operating income (NOI) to its
market value, much like the inverse of a price earnings ratio in the stock market. Both space
and capital market forces affect cap rates. Space market forces influence cap rates directly
through income, while capital market forces affect pricing.

The results from this study indicate that differences across property types are
important in evaluating capitalization rates. The capitalization rates are strongly related to
capital market returns. Factors that seem important today may become outdated and
irrelevant after few years. This is a dynamic, competitive, and highly complex industry. The
framework of factors presented in the text will indubitably help the investors to achieve their
set objectives, gain a competitive advantage, and maximize the return on the real estate
property. Real estate capitalization rates have plunged amid fierce competition for core assets
with secure and predictable cash flows. The real estate industry is capital intensive and relies
heavily on debt.


A.2 Classification of data

Property Classification
Classification of Property type - Based on risk in that property

Property Type Rank

Hotel 3
Office / Retail 2
Industrial / Mixed
Use / Multifamily / 1
Self storage
Location and Market Classification
Classification for Location and Market - Based on per capita income of the County

Per Capita Income Rank

Less than $25,000 5
$25,000 - $50,000 4
$50,000 - $75,000 3
$75,000 - $1,00,000 2
More than $1,00,000 1


Books Referred:

• Business statistics - Gupta

• Business statistics - Arora

• Research methodology – Kothari


• www.zenta.com

• www.cbre.com
• www.pulawski.com

• www.realestatejournal.com

• www.realtyrates.com

• www.articlesbase.com

• www.census.gov

• www.reis.com

• www.ncreif.com

• www.bloomberg.com