A Cross-Sectional Analysis of Cap Rates by MSA

Abstract

There are a number of global factors driving capital markets and required rates of return that help to explain observed capitalization rates or “cap rates” over time, but little is known about the factors driving the geographical cross-sectional variation of these cap rates. This paper uses data from Real Capital Analytics for multifamily properties to explore several models that combine the expected influences from housing demand growth, supply constraints, liquidity risk and the interaction of these. The findings reveal a very strong and robust relation between supply constraints and cap rates, as well as evidence of capital flowing from larger markets to smaller markets in recent years. There is also weak but generally supportive evidence of influences from expected growth rates, liquidity, and other risk factors.