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How Should Commercial Real Estate Be Priced

Working paper #637
Peter Linneman and David Rubenstein

When it comes to real estate pricing, most investors revert to the cap rate because it’s simple, and it’s the norm of the industry. But a correlation analysis indicates that cap rates have been largely unresponsive to alternative rates of return available to investors, with the exception of BBB bonds, over most of the past twenty-five years. Other pricing tools such as the Capital Asset Pricing Model; a comparative analysis with assets of similar credit risk; and the Gordon Dividend Growth Model provide much more elegant, yet still simple, alternatives to evaluating real estate pricing.

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