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Some Thoughts on Real Estate Pricing

Joseph L. Pagliari
The Journal of Portfolio Management Special Real Estate Issue 2017, 43 (6) 44-61; DOI: https://doi.org/10.3905/jpm.2017.43.6.044
Joseph L. Pagliari Jr.
is a clinical professor of real estate at the University of Chicago Booth School of Business in Chicago, IL
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Abstract

In this article, the author examines two key aspects of commercial real estate pricing. First, the spread between interest rates and commercial real estate pricing represents the market’s consensus view on the future growth of real estate’s (unlevered) cash flow less the differential in their return premiums. Second, real estate pricing itself is examined. Real estate’s (unlevered) cash-flow yield should equal the real return requirement grossed up for inflationary effects plus the uncompensated portion of inflationary growth in future cash flows (i.e., the extent to which the expected growth of real estate’s cash flow lags the expected inflation rate). A change in interest rates resulting from a change in the expected inflation rate will not affect real estate pricing, provided the real estate markets are operating at or near equilibrium. A change in interest rates resulting from a change in the real-return requirement will directly affect real estate pricing—even when the real estate markets are operating at or near equilibrium.

TOPIC: Real estate

  • © 2017 Institutional Investor, LLC
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The Journal of Portfolio Management: 43 (6)
The Journal of Portfolio Management
Vol. 43, Issue 6
Special Real Estate Issue 2017
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Some Thoughts on Real Estate Pricing
Joseph L. Pagliari
The Journal of Portfolio Management Sep 2017, 43 (6) 44-61; DOI: 10.3905/jpm.2017.43.6.044

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Some Thoughts on Real Estate Pricing
Joseph L. Pagliari
The Journal of Portfolio Management Sep 2017, 43 (6) 44-61; DOI: 10.3905/jpm.2017.43.6.044
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  • Article
    • Abstract
    • MISCONCEPTIONS IN RELATIVE PRICING
    • A CONCEPTUAL EXAMINATION OF THE SPREAD
    • A DIGRESSION: CHANGING CAPITALIZATION RATES AND OTHER VIOLATIONS OF THE DDM
    • HOW SHOULD CAPITALIZATION RATES BE DETERMINED?
    • CONCLUDING REMARKS
    • ENDNOTES
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