Interest rates, capitalization, real estate investment, elasticity


"The investment real estate market in the United States experienced tremendous growth and robust returns in the first half of this decade followed by a severe decline in the second half as evidenced by declining property values and sub-par returns. There were many causes for the decline in the real estate investment market. This paper explores one and asks the question: How susceptible are real estate returns to changes in interest rates in the broader economy? Or, put another way, what is the interest rate elasticity of capitalization rates? Utilizing methods from the valuation of fixed-income securities, this paper demonstrates the applicability of a methodology developed by Conner and Liang (2005) to analyze the impact of changes in market rates on the capitalization rates of real estate and shows how their technique can be used by practitioners in a specific market."

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