Source: Wall Street Journal

According to this recent article from WSJ, most major banks haven't disclosed the cap rates they are using.

One chunk of exposure is commercial real estate; banks and thrifts hold about $1.7 trillion of commercial mortgages. A benchmark used to value such assets is the capitalization, or cap, rate. This determines property values on the basis of rental income. Take an investor buying an office building with annual income of $15 million. If they offer $200 million, they are using a 7.5% cap rate, which is derived by dividing income by value. Increasing the cap rate implies a lower value for the building.

Cap rates fluctuate depending on the economy and supply and demand for commercial property. During the last real-estate collapse in the early 1990s, cap rates increased to an average of more than 9%. But at the market's peak in 2007, investors were willing to accept cap rates as low as 4% on prime property, partly on the assumption that rents would keep rising.

As banks conduct their stress tests, one big question is what cap rate they are using to value the properties that back their commercial-property portfolios.

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