Module II· Multiples & Sector SpecificsAdvanced
Question
How does cap rate vs. multiple work in real-estate valuations?
Answer
Mechanics
The cap rate (capitalization rate) is the inverse of an EV/NOI multiple:
```
Cap Rate = NOI / Property Value
EV/NOI = 1 / Cap Rate
```
Deep diveShow more details
Example
Inputs:
- NOI: $5m
- Property value: $100m
Calculation:
```
Cap Rate = $5 / $100 = 5.0%
EV/NOI = 1 / 5.0% = 20x
```
Cap-rate logic
a lower cap rate means a higher value (multiple expansion).
Typical cap rates
- Prime office in a top financial center: 3.5–4.5%.
- Logistics properties: 4.5–5.5%.
- Residential in prime locations: 2.5–3.5%.
- Secondary locations: 4.5–6.0%.
Drivers
the level of interest rates (negative correlation), location quality, tenant credit quality, remaining lease term.
Pitch tip
For listed real estate, cap-rate sensitivity is the primary valuation driver — a 50bps cap-rate move corresponds to roughly a 12–15% change in NAV. Always show a cap-rate sensitivity table in a pitch.