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Brian McGowan, CEO of Washington, DC-based Peracon Corp., notes, "Generally speaking, lower cap rates equal higher sale prices, just as higher cap rates equal lower sale prices." But he continues, "For cap rates to be comparable and accurate, the NOI must be calculated using consistent assumptions, which is often not the case."

Gerald S. Monash, president of Lancet Realty Advisors Inc. in Atlanta, agrees cap rate conclusions are only as good as the data. "Since the cap rate only focuses on current or year one NOI, it's crucial that the calculation of NOI be uniform among properties surveyed," he says. In addition, "Poorly leased properties may sell for low cap rates, which do not necessarily reflect a high value, simply because of their lower income streams."

Clifford N. Mendelson, senior managing director of Transwestern Commercial Services' Mid-Atlantic structured finance group, has a different slant on the subject. He tells DEJ, "Cap rate compression has less to do with micro area economic factors than it does with a direct correlation to long-term interest rates and the lack of attractive alternative investments versus real estate. The stronger an economy we have, the higher rents will be. Hence, values increase without cap rates moving." He adds, however, that when the economy rebounds, alternative investments generally become more attractive. Then, he continues, "There is upward pressure on cap rates, which should be balanced by rent increases and properties, therefore, sustain a more moderate growth in value."