Understanding Cap Rates in Real Estate Development

Cap Rate = NOI / Property Value. Small differences translate to large value changes.

What Drives Cap Rates

Property type, location quality, asset quality, interest rates, and market sentiment.

Yield on Cost

YOC = Stabilized NOI / Total Development Cost. The spread between YOC and market cap rate is the development premium. Target 100-150 bps minimum.

Cap Rate Expansion Risk

Rising cap rates during 18-36 month development period can eliminate profit margins. Build to higher YOC, shorten timelines, lock financing early.