Do Discount Rates Predict Returns? Evidence from Private Commercial Real Estate
AbstractThis paper analyzes whether investors’ discount rates predict ex post returns and Jensen’s
alpha in the private commercial real estate market. Tracking 4,430 properties in the U.S.
that were worth 127 billion dollars at acquisition over the 1997 to 2014 period, I find that
individual properties’ acquisition cap rates, which measure discount rates, have
significant predicting power for ex post returns and Jensen’s alpha. The power is robust
across property types and metro areas, is stronger in the short term, and persists when I
control for sample selection, latent factors, heterogeneous factor loadings, and the pricing
of some non-systematic risk.