What goes up ... continues to go up : momentum in commercial real estate forecasting price appreciation via cap rates

In equity markets, dividend yields are highly correlated with future returns, largely through capital appreciation. Taking the same logic and applying it to the commercial real estate market -- could cap rates therefore predict future appreciation return? This paper finds that absolute cap rates are not significantly correlated with future appreciation or depreciation. However, regressions of first-differenced cap rates on future price appreciation find strong statistical significance at one, two, and three-quarter forecasts. The relation is strongest at a two quarter forecast, declining at four-quarter forecasts and thereafter. These findings support a case for momentum in commercial real estate pricing. Pricing movements, via cap rate changes, predict future appreciation or depreciation. The statistical results show that changes in cap rates are inversely correlated with future price appreciation or depreciation. When cap rates shift downward. properties tend to appreciate in future quarters, on average. And when cap rates shift upward, properties tend to depreciate in future quarters, on average. The analysis is bifurcated by asset type and market size. When analyzing this relation on an asset-class level, the predictive power of cap rate changes on future appreciation and depreciation is strongest in retail. Additionally, this relation is stronger in Primary CSAs than in Secondary CSAs. Astute investors should keep a close watch on the capital markets as they implement portfolio management strategies. While not to be utilized in isolation, these findings on momentum should be taken in context of a greater acquisition and disposition strategy.

Department dc:contributor.department

Massachusetts Institute of Technology. Center for Real Estate. Program in Real Estate Development.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2018

Author dc:creator

• Kettler, Frank (Frank Nitsche)

Advisor dc:contributor.advisor

• Walter Torous.

• Center for Real Estate. Program in Real Estate Development.

Statement dc:rights

• MIT theses are protected by copyright. They may be viewed, downloaded, or printed from this source but further reproduction or distribution in any format is prohibited without written permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/120653

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/120653