Cap Rate Decomposition
The algebraic identity that breaks a real estate cap rate into its three drivers: risk-free yield, risk premium, and expected NOI growth. The relationship is cap rate roughly equals risk-free yield plus risk premium minus expected NOI growth. The decomposition is the bridge between real estate underwriting (NOI, growth, risk) and the broader capital markets (Treasuries, credit spreads, sector rotation). Once you can decompose a cap rate, you can read what the market is implying about growth and risk and spot when current pricing requires assumptions that may not hold.
Related terms
Absorption Rate · AFFO per Share · Allowed Return on Equity · Alternative Investments · Anchor Tenant · Assets Under Management
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