PT - JOURNAL ARTICLE AU - Petros S. Sivitanides AU - Raymond G. Torto AU - William C. Wheaton TI - Real Estate Market Fundamentals and Asset Pricing AID - 10.3905/jpm.2003.319905 DP - 2003 Aug 31 TA - The Journal of Portfolio Management PG - 45--53 VI - 29 IP - 5 4099 - https://pm-research.com/content/29/5/45.short 4100 - https://pm-research.com/content/29/5/45.full AB - This article addresses empirically recent concerns about a dichotomy between capital markets and real estate market fundamentals. Motivated by recent decreases in capitalization (cap) rates in light of weak market fundamentals some analysts have argued that the latter no longer matter in real estate asset pricing. Some other analysts argue that these phenomena reflect a structural shift in the way investors' factor market fundamentals in their pricing decisions. Building on the findings of past empirical research, the authors emphasize that the true effect of market fundamentals can be analyzed and understood only after controlling for the effect of interest rates, which recently reached record-low levels. Empirical analysis of cap rate levels and spreads provides evidence of the strong effect of interest rates on cap rate levels, and systematic effects of market fundamentals on both cap rate levels and spreads that reveal a myopic (inefficient) view on the part of real estate investors. No statistically decent evidence is found to point to a weakening of the effect of market fundamentals or a shift towards a forward-looking (efficient) view of such fundamentals in the last two years.