Cap rates reflect how risky a property is. Older buildings with high vacancy need higher returns, so they have higher cap rates and lower values. Well-maintained properties with stable tenants have lower cap rates and higher values for the same income.
The cap rate is fundamentally about risk and return. Higher risk properties, older buildings, deferred maintenance, high vacancies, difficult locations require higher returns from buyers. That means higher cap rates. The higher cap rate means a lower value for the same income. Low risk properties, stable tenants, Well-maintained buildings, strong locations justify lower cap rates for buyers, and the lower cap rate means a higher value for that same income.
