Definition
Cap rate compression happens when property values rise faster than income, reducing returns. It's a sign of market peaks.
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Cap rate compression occurs when property values increase faster than rental income, reducing cap rate returns. Compression indicates market peaks. In strong markets, cap rates compress from 6% to 4% as competition increases. Compression signals caution.
Pro Tip
Avoid high-compression markets. Compression indicates overheating; wait for correction.
Example
Market appreciation causes property cap rate to fall from 7% to 5% despite stable rents; compression indicates expensive market