REAL 5090 Final Exam Review Study Guide
What is the Cap Rate of a property? What is it also known as? - ANSWER AKA
Overall Rate (OAR) or Return on Assets
Similar to a current yield or the current income per dollar of current value
The Cap Rate is determined by capital investment supply and demand in the
asset market, based on what three factors? - ANSWER Opportunity Cost of
Capital
Growth Expectations
Risk
How does the Opportunity Cost of Capital play into the Cap Rates? - ANSWER
The prevailing interest rates and opportunities for earning returns in other forms
of investment in the capital markets are major determinants of how much an
investor is willing to pay for any property per dollar of its current income
How do Growth Expectations play into the Cap Rates? What market are they
looking for growth in? - ANSWER Investors will be looking forward into the future
to see what they can earn from net rents. the net rents the property will be able
to produce will be dependent on the balance between the supply and demand
within the space market
Greater the expectation for future earning, the more they are willing to pay
today
How does risk play into the Cap Rates? - ANSWER if investors regard future
potential net income from the property as less risky and more certain (perhaps
because they view the space market as relatively stable and easy to forecast),
then they will be willing to pay more per dollar of current income for the
property, also reducing the cap rate
Whats is the general relationship between Cap Rates and Risk? - ANSWER The
less risk that is perceived, the higher an investor will be willing to pay for the
property, and the lower the cap rate will be
Is the Asset market segmented like the Space market? - ANSWER No, the space
market demand is very segmented since building users require specific physical
characteristics, whereas in the asset market, investors are demanding cash
flows and returns which can very similar across different property types and
markets
, Be able to walk through the real estate system: What are the main three
components? What exogenous systems feed into the Space Market and Asset
market respectively? - ANSWER Space Market, Asset Market, and the
Development Industry
Local and National Economies Feed into the Space Market and the Capital
Markets feed into the Asset Market
What interactions take place within the Space Market? What two main things
does it determine? What part does the local and national economy play? -
ANSWER There is an interaction of the usage demand with the current stock of
physical space supply, which determines current rents and occupancy levels
within the space market
Additionally, the local and national economies are the underlying determinants
of need for certain quantities of the physical space of various types as a function
of cost for such space
What interactions take place within the Space Market? - ANSWER Within the
asset market, we see that the space market determines the current operating
cash flow produced by the real estate assets that are fundamental subjects o
the asset market
This cash flow interacts with the cap rates required by investors to determine
the current property market values in the asset market
What does both the supply and demand side of the asset market consist of? -
ANSWER Investors within the capital markets
What crucial comparison is made within the Development Industry ?
What is the result of asset values equaling or exceeding development costs? -
ANSWER Current Development costs, including construction and land costs, are
compared against current asset values.
If the asset values equal or exceed development costs, then development will
proceed, thereby adding to the physical stock of on the supply side of the space
market
What is the negative feedback loop within the Real Estate System? - ANSWER
these are the dampening mechanisms that tend to make the system self
regulating, preventing it from spiraling out of control. Within the system, the
principal negative feedback loop is the asset market's ability to regulate the flow
of financial capital to the development industry
Is the Simple interest rate the EAR? - ANSWER
What is the Cap Rate of a property? What is it also known as? - ANSWER AKA
Overall Rate (OAR) or Return on Assets
Similar to a current yield or the current income per dollar of current value
The Cap Rate is determined by capital investment supply and demand in the
asset market, based on what three factors? - ANSWER Opportunity Cost of
Capital
Growth Expectations
Risk
How does the Opportunity Cost of Capital play into the Cap Rates? - ANSWER
The prevailing interest rates and opportunities for earning returns in other forms
of investment in the capital markets are major determinants of how much an
investor is willing to pay for any property per dollar of its current income
How do Growth Expectations play into the Cap Rates? What market are they
looking for growth in? - ANSWER Investors will be looking forward into the future
to see what they can earn from net rents. the net rents the property will be able
to produce will be dependent on the balance between the supply and demand
within the space market
Greater the expectation for future earning, the more they are willing to pay
today
How does risk play into the Cap Rates? - ANSWER if investors regard future
potential net income from the property as less risky and more certain (perhaps
because they view the space market as relatively stable and easy to forecast),
then they will be willing to pay more per dollar of current income for the
property, also reducing the cap rate
Whats is the general relationship between Cap Rates and Risk? - ANSWER The
less risk that is perceived, the higher an investor will be willing to pay for the
property, and the lower the cap rate will be
Is the Asset market segmented like the Space market? - ANSWER No, the space
market demand is very segmented since building users require specific physical
characteristics, whereas in the asset market, investors are demanding cash
flows and returns which can very similar across different property types and
markets
, Be able to walk through the real estate system: What are the main three
components? What exogenous systems feed into the Space Market and Asset
market respectively? - ANSWER Space Market, Asset Market, and the
Development Industry
Local and National Economies Feed into the Space Market and the Capital
Markets feed into the Asset Market
What interactions take place within the Space Market? What two main things
does it determine? What part does the local and national economy play? -
ANSWER There is an interaction of the usage demand with the current stock of
physical space supply, which determines current rents and occupancy levels
within the space market
Additionally, the local and national economies are the underlying determinants
of need for certain quantities of the physical space of various types as a function
of cost for such space
What interactions take place within the Space Market? - ANSWER Within the
asset market, we see that the space market determines the current operating
cash flow produced by the real estate assets that are fundamental subjects o
the asset market
This cash flow interacts with the cap rates required by investors to determine
the current property market values in the asset market
What does both the supply and demand side of the asset market consist of? -
ANSWER Investors within the capital markets
What crucial comparison is made within the Development Industry ?
What is the result of asset values equaling or exceeding development costs? -
ANSWER Current Development costs, including construction and land costs, are
compared against current asset values.
If the asset values equal or exceed development costs, then development will
proceed, thereby adding to the physical stock of on the supply side of the space
market
What is the negative feedback loop within the Real Estate System? - ANSWER
these are the dampening mechanisms that tend to make the system self
regulating, preventing it from spiraling out of control. Within the system, the
principal negative feedback loop is the asset market's ability to regulate the flow
of financial capital to the development industry
Is the Simple interest rate the EAR? - ANSWER
