Cap Rates are Still Dropping in Some Markets - Here's Why

Cap Rates are Still Dropping in Some Markets - Here's Why // The basic formula to calculate cap rates for recent property sales is:

Cap Rate = Projected NOI / Acquisition Price

And if we play around with the algebra a little bit, we can also see that we can back-solve to an acquisition price using this formula by calculating the following:

Acquisition Price = Projected NOI / Cap Rate

This means that as cap rates rise in relation to NOI values, property values fall, and when cap rates fall in relation to NOI values, property values rise.

Investors don't like uncertainty, and with so much of that in the real estate markets this year, conventional wisdom would lead us to believe that cap rates would be higher across the board, leading to lower property values throughout the US as a result.

But earlier this month, CBRE released their Q3 2020 Cap Rate Survey, which painted a slightly different picture than what conventional wisdom might be telling us.

In fact, certain markets and product types actually saw cap rate decreases since the second half of 2019, meaning property values have actually gone up in relation to NOI for some properties, despite all the chaos of the first three quarters of 2020.

So in this week's video, what we’re going to do is break down what’s going on with cap rates right now according to CBRE data, where they might go in the future, and the why behind these data points that might not be so obvious at first glance.

If you’re looking to make a real estate investment by the end of the year, or you just want to be able to answer the question, “Where do you think prices are headed?” for an upcoming CRE interview, you'll want to check out this week's video:

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Link to the CBRE Q3 US Cap Rate Survey: https://www.cbre.us/research-and-reports/US-Cap-Rate-Survey-Special-Report-2020

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