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:

The discount rate used in TVM (time value of money) calculations has increased

The discount rate used in TVM (time value of money) calculations has decreased

Property values have increased

Property values have decreased

Answer: Property values have decreased

Explanation:

The Capitalization Rate (Cap Rate) is a measure in the Real Estate world that is used to indicate the rate of return that is to be generated on a real estate investment property.

It is calculated by,

Capitalization Rate = Net Operating Income / Current Market Value.

If Cap Rates are increasing then it would mean that either the numerator is increasing or the denominator is decreasing. The last option says that Property Values have decreased so that must be the correct option because as the denominator, if Property values decrease, Cap Rates increase.

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