Question

For each of the factors listed below indicate whether the factor, independently, is likely to cause a particular income producing property to trade for a lower or higher CAP rate compared with an average property. For this question, no explanation is needed. Indicating "higher" or "lower" for factors a through g is sufficient. a. Lower volatility in rent prices and occupancy rates. b. Worse location c. High inflation environment d. High risk premium environment e. Market general higher than normal expected NOI growth f. Lower construction quality g. High quality tenants

Answer 1

CAP is a measure the return on the real estate

Lower volatility in rent prices and occupancy rates: This will cause the property to trade for a lower CAP as investors will require less returns because of stability and lower volatility.

Worse location: This will cause the property to trade at lower CAP because tenants will pay less rent and capital investment is low,

High inflation environment: This will cause the property to trade at higher CAP because investors will require higher returns because the purchasing power or value of money is decreasing and everything is more expensive so required return will also be higher.

Market general higher than normal expected NOI growth: This will cause the property to trade at higher CAP because investors will require higher returns because there are higher expectations from the net income

Lower construction quality: This will cause the property to trade at lower CAP because the capital investment is lower and because tenants will pay lower rents for poor construction

High quality tenants: his will cause the property to trade at lower CAP because this makes the investment more attractive for the investor therefore decreasing the required rate of return

Explanation: