Question

Economists are predicting continued demand for industrial space and the institutional investment world is allocating more capital into this sector. What affect will this demand likely have on "cap rates" in the market?

	a.	Cause "cap rates" in this sector to fall
	b.	Cause "cap rates in this sector to rise
	c.	Have no effect on "cap rates" as they are property specific
	d.	Put a "Cap" on the amount investors will pay for industrial type buildings.

Answer 1

When there will be increase in demand for industrial space and institutional world is allocating more capital into the sector, it will mean that there will be decrease in the capitalisation rate, because capitalisation rate is just like the discounting rate, so capitalisation rate will be decreasing in order to increase the overall values of the properties.

Increased demand is reflecting that it is stemming out of lower opportunity cost of capital and it will be leading to lower capitalisation cost

Correct answer is option (A ) Cause CAP RATES in this sector to fall.