Determination of Effective Capitalization Rates for Commercial Real Estate

Abstract

For effective management of the commercial real estate, it is important to determine the capitalization rate. For this purpose, the revenue approach is used. In order for the result to be real for each segment of commercial real estate, it is important to determine the capitalization rates as accurately as possible. This article discusses two methods for calculating the capitalization rate. For the purity of the experiment, the same commercial real estate items in three different segments were used for both methods. This is an office, retail and industrial warehouse. Based on the comparison, one of the two options is selected, which is optimal and detailed. All calculations were made on the example of the city of Yekaterinburg. The time period is six months. Based on the experience gained, the authors suggest using the data obtained for further calculation of the capitalization rate. For clarity of the results obtained, graphs of the dependence of values were compiled. To calculate this indicator, the authors formed a sample of 26 pairs of offers that were simultaneously in the status of full sale and lease. The article presents a constructive and consistent analysis of the capitalization rate calculation using various methods, as well as informative conclusions. We hope that this method will be useful for practical evaluation. © Published under licence by IOP Publishing Ltd.