Almost every commercial property trades on some version of the same formula: value equals NOI divided by cap rate. The income is the part you can see. The cap rate is the market's mood.
The sliders below let you test both. Watch how the same income stream can be worth wildly different amounts depending on what buyers are paying for income that year.
Implied Value
$8.33M
$500K NOI at a 6.00% cap
At 5.75% (25 bps tighter)
$8.70M
+$362K vs. current
At 6.25% (25 bps wider)
$8.00M
-$333K vs. current
NOI Multiple
16.7x
The price as a multiple of income. Tighter cap, richer multiple.
The same NOI across the cap rate spectrum
Value = NOI / cap rate. The curve is steepest at low cap rates, which is why a 25 bps move matters so much more at a 4 cap than at an 8 cap.
What this means
A cap rate is the market's price for a stream of income. Push the NOI slider and the value moves in a straight line. Push the cap rate slider and it moves like a lever: at your current settings, a quarter point of cap rate movement swings the value by about $348K. Sellers want compression, buyers want expansion, and everyone is arguing about the denominator.
Want to see how we apply this?
This is the math behind every deal we underwrite.