Real Estate Economics

Real estate economics applies economic methods to property markets: supply and demand for space, rents, construction and prices. The cap rate is its link between the market for space, which sets rents and NOI, and the market for property as an investment, which sets prices.

The four-quadrant model developed by DiPasquale and Wheaton makes this explicit. Rent from the space market is converted into price by a cap rate from the capital market; price drives construction; construction adds to the stock of space and feeds back into rent.

The practical point for an investor is that cap rates respond to forces outside any single property: interest rates, investor demand and expected growth. A property's NOI can hold steady while its value changes because the market's cap rate moved.