The price-to-earnings ratio, or P/E, is a standard tool to estimate the price and value of a public company’s stock. CBRE just pointed out that the same calculation can help determine whether the price of a commercial real estate property would allow for a strong potential return.
The first step CBRE took was to take the current all-property cap rate to an implied P/E ratio of 17.7. Then they compared the P/E ratio to the “projected five-year forward average return.”
There is a negative correlation between the P/E ratio and five-year time horizon future returns. The higher the price-earnings ratio, the lower the expected returns. Similarly, the lower the P/E ratio, the higher the return.
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