The cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that:
A) The discount rate used in TVM (time value of money) calculations has increased
B) The discount rate used in TVM (time value of money) calculations has decreased
C) Property values have increased
D) Property values have decreased

Question

Quizplus · Accepted Answer

The cap rate is the rate of return that an investor can expect to earn on a property. An increase in cap rate means that the property is expected to generate lower returns in the future, which could be due to factors like higher property operating costs, lower rental income, or market conditions. As a result, property values would decrease as investors are willing to pay less for a property that generates lower returns. Therefore, the correct answer is D - property values have decreased.

The Cap Rate Is an Important Metric That Investors Use