WACC for U.S. Real Estate Investment

The U.S. real estate market continues to face challenging conditions, driven by concerns over high interest rates, a potential economic recession triggered by the establishment of work-from-home practices following the COVID-19 pandemic, unpredictable tariff policies, and other factors.

In such an uncertain environment, undervalued investment opportunities—so-called distressed deals—are likely to emerge. Against this backdrop, some of you involved in U.S. real estate investment may be wondering what target IRR (internal rate of return) should be set for these opportunities. In my work, I also review investment prospects—primarily in offices and rental housing—on a daily basis. However, regardless of how undervalued a property may appear, it is often difficult to judge whether the expected return is truly commensurate with the associated risks.

Therefore, in this article, I would like to consider the expected return set by U.S. real estate companies by focusing on “cost of capital” (=WACC, weighted average cost of capital), which is a major factor in expected return in the U.S. real estate investment market.

Executive Summary

What is Cost of Capital?

The cost of capital is the cost of financing a company, commonly referred to as the weighted average cost of capital (WACC). It consists of the cost of equity—reflected in dividends and stock price appreciation—and the cost of debt, which is represented by interest expenses.

Since companies make investments using funds raised through either equity or debt, the IRR on investments must always exceed the company’s WACC. In other words, the expected return on an investment set by the company must at least exceed its WACC. It is also reasonable to assume that a risk premium is added to the WACC, reflecting the specific risk of each investment, and that an expected return is set accordingly for each project.

Cost of Capital for U.S. Real Estate Investment

To understand the cost of financing real estate investments in the U.S., we refer to data from U.S.-listed REITs. The Stern School of Business at New York University has compiled cost of capital data for 192 U.S.-listed REITs as of January 2025. Based on this data, we have summarized the historical trends in the cost of equity, cost of debt, and WACC for U.S. REITs since 2000. For reference, long-term government bond yields are also included.

WACC of U.S. REIT rose significantly from 2019 to 2022 during the COVID-19 pandemic, declined in 2023, and rose slightly again in 2024.

• Cost of equity: 5.5% (2019) to 10.2% (2022) to 8.7% (2024)
• Cost of debt: 2.7% (2019) → 4.7% (2022) → 5.5% (2024)
• WACC: 3.9% (2019) -> 7.3% (2022) -> 6.6% (2024)

While it is easy to assume that the cost of debt has increased due to the significant policy rate hikes over the past three years, the cost of equity capital rose even more sharply through 2022. Unlike the cost of debt, the cost of equity—comprising dividends and stock price appreciation—cannot be precisely calculated, as it depends on future corporate performance. However, under the Capital Asset Pricing Model (CAPM), it is generally understood that higher stock price volatility leads to a higher cost of equity.
Among all sectors, the real estate market, particularly REITs, experienced the most dramatic changes due to the COVID-19 pandemic. Up until 2022, extreme market volatility drove the cost of equity to levels comparable to those seen during the collapse of Lehman Brothers. After 2023, as volatility in the REIT market subsided, the cost of equity also declined.

As a result, the weighted average cost of capital (WACC) rose significantly from 3.9% in 2019 to 7.3% in 2022 (+3.4 percentage points compared to 2019), before declining to 6.6% in 2024 (▲0.7 percentage points compared to 2022). In other words, it is reasonable to assume that the average expected return currently targeted by U.S. REITs is at least 6.6%.

Of course, U.S. REITs vary widely, as they can generally be categorized into two business models—development and ownership/leasing—and cover a diverse range of asset types, including office buildings, rental housing, warehouses, retail, hotels/resorts, data centers, and others.

Therefore, it would be reasonable to apply a lower expected return than 6.6% to sectors such as rental housing, warehouses, and data centers, which are performing relatively well in the real estate market, and a higher expected return than 6.6% to sectors such as office, which continue to face more challenging market conditions.

Cost of Capital by Business Type

The database provided by Damodaran Online also summarizes the cost of capital by business type within the U.S. real estate industry.

Companies classified as REITs may engage in development projects; however, they are generally more focused on relatively low-risk ownership and leasing activities.
In contrast, companies categorized under Real Estate (Development) primarily engage in development projects, which inherently carry higher risks. This higher risk profile is reflected in both their cost of equity and cost of debt, each being 0.3 percentage points higher than those of REITs. Nonetheless, given the higher debt ratios employed by Real Estate (Development) companies, their overall WACC (cost of capital) stands at 6.6%, which is comparable to that of REITs.

However, we expect the WACC for Real Estate (Development) to exceed that of REITs in 2025, reflecting concerns over rising construction costs and potential project delays driven by escalating tariff policies.

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• Real Estate05/12/2025WACC for U.S. Real Estate Investment