Cap rates as spatial–temporal signals: submarket heterogeneity and the limits of market averages

Capitalization rates are widely used in commercial real estate valuation but often treated as static summaries of income risk rather than dynamic economic signals. This paper reconceptualizes office cap rates as spatial–temporal indicators that embed information about local conditions, capital flows, and structural heterogeneity across metropolitan markets. Cross-sectional dispersion and temporal variation are interpreted not simply as noise, but as potentially systematic outcomes operating across geographic and temporal scales. Drawing on urban economics, asset pricing, and spatial analysis, the paper develops a conceptual framework in which cap rates respond jointly to macroeconomic conditions, metropolitan fundamentals, and localized submarket forces. It highlights spatial dependence, temporal persistence, and nonlinear interactions, while explaining how conventional hedonic models may obscure these dynamics through restrictive functional forms. By treating cap rates as information-rich signals rather than passive valuation ratios, the paper offers an integrated perspective on spatial heterogeneity, temporal evolution, and market segmentation in office property markets.