Capital Market Expectations - Cap rate

CFA Level III Alternative Investments
#1

Hi,

How does high vacancy rate induce high cap rate? Since cap rate=NOI/Property value, shouldn’t high vacancy will have low NOI, thus lower cap rate?
Struggling to understand the r/s.

Thanks in advance

#2

Cap rate refers to the inherent riskiness of the project.

More vacancy means a riskier project.

So regardless of the NOI, the value of the property is lower because of the higher cap rate. Because it’s riskier, and therefore it won’t sell for a premium compared to less risky projects.

Cheers - good luck - you got this :+1:

#3

Nice and simple explanation.
Thanks Grey_beard! :+1:

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