Commercial Real Estate at the ZLB

Investment Demand and CAPM-WACC Invariance


  • Bjørnar Karlsen Kivedal Østfold University College
  • Trond Arne Borgersen



This paper analyses the implications of a low interest rate environment (the zero lower bound – ZLB) for the demand of commercial real estate. The main intention of the paper is to track any asymmetry between evaluation models at ZLB relative to more “normal” interest rate levels. First we apply a conventional net-present value (NPV) approach, where the weighted average cost of capital (WACC) and the capital asset pricing model (CAPM) are used for evaluation. Considering the invariance level of systemic risk we find WACC to be an alternative to CAPM for offensive and defensive investments when interest rates are “normal”. However, at the ZLB, WACC is an alternative for investments that carry the same risk as the market and beta-values are close to one. Second, we simulate our models using US data to see how the WACC shortcut performs across different interest rate levels, and especially at ZLB, in this economy. We see differences between the period preceding the financial crisis and the period after 2010, even though the Federal Funds rate is close to zero in both periods. We relate this to the difference in systemic risk between the two periods, and show how the result in the latter period is quite equal across evaluation models.




How to Cite

Kivedal, B. K., & Borgersen, T. A. (2018). Commercial Real Estate at the ZLB: Investment Demand and CAPM-WACC Invariance. Nordic Journal of Surveying and Real Estate Research, 13(1), 32–53.