What causes cap rate compression?

Increased investor demand, low interest rates, and strong NOI growth all compress cap rates. When cap rates compress from 6% to 5%, a property with $100,000 NOI increases in value from $1.67M to $2M — a 20% gain.

Is cap rate compression sustainable?

Cap rate compression is cyclical. After the 2008 and 2020 cycles, compression drove large CRE gains. Rising interest rates cause cap rate expansion (decompression), which reduces property values.

How do I model total return with cap rate compression?

Total return = NOI yield + NOI growth + cap rate compression (or expansion) gain/loss. This separates income return from appreciation return for institutional-quality underwriting.

Cap Rate Compression Analysis Calculator

Analyze the impact of cap rate compression on investment property value. Shows how falling cap rates increase valuations and quantifies holding period returns from compression.

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Frequently Asked Questions

What causes cap rate compression?

Is cap rate compression sustainable?

How do I model total return with cap rate compression?