What is Cap Rate Compression?

What is Cap Rate Compression?

Cap rate compression occurs when capitalization rates (cap rates) decrease, typically due to increased property values and/or lower perceived investment risk. This often happens in strong markets where demand for real estate is high, driving up prices while net operating income (NOI) remains stable or grows at a slower pace. Factors contributing to cap rate compression include low interest rates, strong investor demand, limited supply, and improved property fundamentals. While it benefits current owners by increasing asset values, it can make acquisitions more expensive and reduce future returns for buyers.