Cap Rates Redux

Canadian property markets cushioned for 2009 - FP Trading Desk

Another story about how the Canadian market is not as weak as other markets around the world.  This is good news only in that it indicates that our landing won't be so hard as that felt by the US and other foreign commercial real estate markets.

While income growth is strong in all categories in Canada, rising cap
rates are cutting into total return. The cap rate reflect
(sic) the rate of
return on a property and as it goes up the value of the property
declines.


As posted previously, cap rates are a measure of the value of a property based on its income and the rate of return expected by the investor.  This is an inverse relationship where the lower the cap rate the higher the value and the higher the cap rate the lower the value.  As the economy weakens and the credit worthiness of the tenants goes down, the expected rate of return, the cap rate, goes up.


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