Short-Term and Long-Term Discount Rates for Commercial Real Estate

How should executives discount commercial real estate cash flows up to 30 years in the future? In this paper, we develop a novel methodology to estimate the term structure of discount rates for commercial real estate cash flows. We find that the average term structure is downward sloping: longer maturity cash flows carry less risk, and the appropriate discount rate for these cash flows is quite often lower than that estimated from the unconditional single period CAPM. These findings are consistent with recent theory suggesting that rare-catastrophic events can lead to an inverted term structure of discount rates in real estate.