Office Building Capitalization Rates: The Case of Downtown Chicago |
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Authors: | John F McDonald Sofia Dermisi |
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Institution: | (1) University of Illinois at Chicago, Chicago, IL 60607, USA;(2) Roosevelt University, Chicago, IL 60605, USA |
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Abstract: | This paper is an empirical study of the capitalization rates for 132 office building sales in downtown Chicago from 1996 to
2007. The capitalization rate is hypothesized to be a function of the classic capital asset pricing model variable and variables
intended to capture the expectation that the real market value of the building will change. The results show that the capitalization
rate for office buildings incorporates a very low value for “beta.” A lower capitalization rate was associated with a smaller
risk-free rate, a lower borrowing rate, class A buildings, newer buildings, buildings that had been renovated, a reduction
in the vacancy rate in the downtown Chicago office market, and an increase in employment in the financial sector of the metropolitan
area. |
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Keywords: | |
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