Office capitalization rates: Real estate and capital market influences

Focusing on the office capitalization rate, the central objective of this article is to shed light on two sets of issues that have not yet been fully researched. The first involves the importance of local-fixed and time-variant components of the office capitalization rate, and the significance of persistence in its time trends. The second centers on the relative importance of local office markets and the national capital market in shaping the various components of the office capitalization rate. Extensive econometric analysis of capitalization-rate series employed to address these issues highlights the existence of both local fixed and time-variant effects, while indicating differential persistence of time trends across markets. Moreover, such analysis uncovers the pivotal role of specific local office-market traits and the lesser role of national capital-market features in determining office capitalization-rate variations. Such findings on the role of local influences may provide a richer foundation for asset valuation and investment practices.