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Cap Rate Compression Calculator
When cap rates compress (go down), property values rise even if NOI doesn't change. This calculator sizes the value lift from a cap-rate move so investors can quantify market tailwinds separate from operating performance.
Value lift from compression
$501,672
Value at entry cap
$3,846,154
Value at exit cap
$4,347,826
% value lift
13.04%
Cap rate move (bps)
75
How the math works
Cap-rate compression means the market will pay more per dollar of NOI. If NOI stays flat but cap rates fall from 6.5% to 5.75%, the property value rises ~13% purely from market tailwinds.
Sophisticated investors separate value creation into: (1) NOI growth from leasing/operations and (2) cap-rate movement from market forces. Never underwrite compression as your primary return source — it's exogenous and unpredictable.
How to Use
- Enter current NOI.
- Enter entry cap rate at acquisition.
- Enter exit cap rate at sale.
- Read implied value lift from compression.
Frequently Asked Questions
What causes cap-rate compression?
Falling interest rates, strong buyer demand, limited supply, and narrowing risk perception. Cap rates also compress in hot asset classes like industrial in 2019-2021 or multifamily in low-rate environments. Compression = price per dollar of NOI rises.
Is compression sustainable?
No — cap rates mean-revert. Underwriting an exit at 50-100bps below entry is aggressive and often fails in rising-rate environments. Stress-test with flat or expanded exit cap rates to see downside.
How much value does 25bps move?
On a 5% cap property, 25bps of compression (5.00% → 4.75%) lifts value by ~5.3%. On a 7% cap, the same move lifts value ~3.7%. Lower-cap assets are more sensitive to basis point moves.
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