Cap Rate Compression

Cap rate compression occurs when capitalization rates decrease over time, typically driven by high investor demand, low interest rates, or a flight to quality — resulting in higher property valuations for the same level of income. For example, if a NNN property generating $60,000 in annual NOI was valued at a 6% cap rate ($1,000,000), and cap rates compress to 5%, the same property is now worth $1,200,000 — a 20% increase in value with no change in income. Cap rate compression was dramatic from 2010-2022 as interest rates fell to historic lows. The opposite — cap rate expansion — occurred in 2022-2023 as the Fed raised rates rapidly. Understanding cap rate cycles is crucial for timing NNN acquisitions and dispositions.