Why cap rate is positively related to vacancy rate? Because When vacancy rate increases, demand for property price decrease and thus cap rate increases? If yes, then high vacancy should also decrease the noi…can anyone help?
Cap rate = r - g
The higher the cap rate, the riskier the investment/property (high r), and could also mean the asset is a low-growth one (low g).
Cap rate is usually used as an indicator of demand of a property in a specific location. Higher cap rate could mean lower demand.
The NOI is static based on the coming year estimation, whereas the Cap rate is more of a forward-looking indicator.
As cash flow riskiness increases with increase in vacancy rates and the cap rates factor in that risk. And hence, the higher cap rate.
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NOI is not only subject to overall market conditions but also other factors. For eg there may be caps or floors for the lease in the specific market or a change in govy policy ecpected in 6 months will favour leases and hence NOI has maintained levels despite high vacancy. Hence vacancy rates may or may not decrease NOI in the short run. Whereas property prices have a direct relationship with vacancy. As vacancy increase property price will decarease. Hence Cap rate tends to increase with increase in vacanacy rates in the short run.