Capitalization Rates and Transaction Activity in International Office Markets: A Global Perspective

Based on a sample of office markets in 33 cities across 16 countries for the period 2007–2015, this paper explores variations in commercial real estate transaction activity and asset pricing in international office markets. It is argued that there are complex interactions and feedback relationships between asset prices, transaction activity, market conditions and local institutional structures in real estate markets. Commercial real estate pricing is modelled using data on capitalization rates. The relationships found are consistent with previous research in terms of the importance of drivers such as government bond yields, yield spreads and real estate rents. Consistent with information network effects, it is also found that larger and more mature markets tend to have lower cap rates and, thus, higher asset prices. The results for transaction activity are less clear cut. Results from econometric analysis of turnover rates suggest that the same explanatory factors do not determine transaction activity to the same extent as cap rates. When purged of possible joint determinants, there is no evidence to support the view that cap rates affect market turnover rates or that turnover rates affect cap rates.