January 14, 2008
Stanley Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, predicted capitalization rates—a measure often used to determine the value of income-producing property—will rise quickly in troubled areas, especially on office buildings in overbuilt areas. If cap rates rise to 7.5% from 7%, property values could decline by 5% to 10%, he said.
Since commercial properties have multiyear leases, operating income doesn't dry up immediately in the event of an economic downturn, so commercial property values are not subject to the same factors that led to the quick devaluation of residential properties seen last summer, Mr. Ross added.