We’ve compiled the most frequently asked commercial real estate interview questions in the following post to help candidates prepare for CRE roles. Table of Contents
Q. What happens to the property values in the commercial real estate (CRE) market when interest rates rise?When interest rates rise, the capitalization rates most often follow suit. Moreover, if cap rates increase, property values tend to decline. However, there are some economic benefits that can help mitigate the decrease in property values. Fundamentally, rising cap rates are often a sign of a strong real estate market and economy, signifying that the real estate outlook is likely positive. Since rising interest rates mean that financing costs are higher, the pace of new supply (i.e. new properties flowing into the market) can slow down while demand remains the same – so rent tends to increase in such times. Q. Why do higher interest rates cause real estate purchase prices to decline?If interest rates increase, borrowing becomes more expensive, which directly impacts the returns of real estate investors. In a higher interest rate environment, investors must offset the higher cost of financing with a reduction to purchase prices – since a lower purchase price increases returns (and enables them to achieve their targeted return). Therefore, as interest rates climb upward, cap rates are also expected to rise, placing downward pressure on pricing. Q. What is the net absorption rate?The net absorption rate is a measure of supply and demand in the commercial real estate market, so the metric attempts to capture the net change in demand relative to supply in the market. Calculating net absorption involves taking the sum of physically occupied space in square feet and subtracting the sum of square feet that became physically vacant over a specified period, most often a quarter or a year. Net Absorption Formula Q. What is the difference between positive and negative net absorption?
Q. What is the difference between NOI and EBITDA?The net operating income (NOI) metric measures the profitability of a real estate firm before any corporate-level expenses such as capital expenditures (Capex), financing payments, and depreciation and amortization (D&A). Net Operating Income Formula NOI is frequently used among real estate firms because it captures the property-level profitability of the firm prior to the effects of corporate expenses. In contrast, EBITDA – which stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization” – is most commonly used to measure the operating profitability of traditional companies, meaning that NOI can be thought of as a “levered” variation of the EBITDA metric. Q. Which is used more in real estate investment banking: NPV or IRR?Both the net present value (NPV) and internal rate of return (IRR) are important metrics to consider for all real estate investors. However, the IRR is arguably used more frequently because the IRR represents the discount rate at which the NPV of future cash flows is equal to zero. In other words, the minimum required return on an investment is based on the implied IRR. Further, the IRR is more easily used to compare the returns on real estate investments relative to other asset classes such as equities, fixed income, and other types of real estate investments. Q. What are the different types of leases?
Q. What are the three methods for valuing real estate assets?The three methods to value real estate assets are the cap rate, comparables, and the replacement cost method.
Q. Compare the cap rates and risk profiles for each of the main property types.
Q. Walk me through a basic pro forma cash flow build for a real estate asset.
Q. If you had two identical buildings in the same condition and right next to each other, what factors would you look at to determine which building is more valuable?The primary focus here should be on the cash flows, especially around the risk associated with the cash flows (and the creditworthiness of the tenants).
Q. Describe the four main real estate investment strategies.
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