QUESTION 11

1.The capitalization rate can be decomposed into three distinct components: a risk-free return, a risk-premium specific to investment in real estate, and the expected average growth rate of NOI. Consider a generic property in Newark that will generate income NOI next year with certainty. How will cap rates and property values respond if institutional investors increase the allocation of stocks and bonds in their funds and reduce their exposure to in commercial property investment in New Jersey?

cap rates will increase and property values will decrease.

cap rates will increase and property values will increase.

cap rates will decrease and property values will increase.

cap rates will decrease and property values will decrease.