After rising 300 to 500 basis points in 2009, average transaction-based cap rates fell in 2010 through early 2011. Why have cap rates fallen so quickly when fundamentals have yet to show meaningful gains? Won’t cap rates increase if inflation and interest rates begin to rise?
Cap rates represent the initial return to the investor based on the purchase price and the annual net operating income the property generates. This definition often leads to confusion. Consider this seemingly straightforward statement: “A rise in cap rates implies a decline in property value.” This is not necessarily true.