Cap rate compression is characterized by which of the following effects on property value for a given NOI?

Cap rate compression is characterized by which of the following effects on property value for a given NOI?

• A. It reduces property value for a given NOI
• B. It has no effect on property value
• C. It increases property value for a given NOI
• D. It increases property value only if NOI grows

Answer: (C)

Cap rate compression raises property value when NOI stays the same. Value is calculated as NOI divided by the cap rate, so a lower cap rate increases the value for a fixed NOI. For example, with NOI of 100, a cap rate of 10% gives 1,000 in value; if the cap rate compresses to 8%, the value jumps to 1,250. The other statements don’t fit because reducing value would require a higher cap rate, no effect would mean the cap rate didn’t change, and saying value increases only if NOI grows ignores the impact of a lower cap rate on value.

Cap rate compression raises property value when NOI stays the same. Value is calculated as NOI divided by the cap rate, so a lower cap rate increases the value for a fixed NOI. For example, with NOI of 100, a cap rate of 10% gives 1,000 in value; if the cap rate compresses to 8%, the value jumps to 1,250. The other statements don’t fit because reducing value would require a higher cap rate, no effect would mean the cap rate didn’t change, and saying value increases only if NOI grows ignores the impact of a lower cap rate on value.