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."

David Wells, an investment associate in the Chicago office of Marcus & Millichap Real Estate Investment Brokerage Co., agrees. "Suburban market rents have been increasing steadily during the past few quarters," he says. "This growth has facilitated an increase in per sf pricing, while allowing cap rates to remain consistent."

In a newly issued report, Maria Sicola, senior managing director of research in C&W's San Francisco office, reports declining cap rates in many CBDs nationwide. As cap rates decrease, selling prices usually increase, she tells DEJ. "Largely dependent on regional and local drivers, as well as defined balance between supply and demand, the office market remains insulated from a declining economy and is expected to remain healthy through 2007," she says.

However, Thomas Lorenzini, managing director in the Chicago office of Tremont Realty Capital LLC, adds, "Whether or not office is insulated from a declining economy really depends on the specific demand generators for that market." He agrees cap rates have declined for newer and more efficient buildings, which are leased to long-term, quality credit tenants with little to no near-term rollover. However, he says, "It is a case of haves and have-nots. If there is significant near-term rollover or significant vacancy in an older, less efficient building, cap rates did not and are not dropping to the same levels. You could have two buildings next to each other that trade at dramatically different dollars per sf."

Dean Fritchen, a senior associate in the Winter Park, FL office of Coldwell Banker Commercial, says he has seen the same situation in his market. "The cap rate may vary in different areas of a city for many reasons, such as desirability of location, level of crime and general condition of an area," he says. "You would expect lower capitalization rates in newer or more desirable areas of a city and higher cap rates in less desirable areas to compensate for the added risk."

Randy Smith, director of research in the Tampa, FL office of GVA Advantis, says the average cap rate for both the CBD and suburban markets in the Tampa Bay region are stable. Citing research from New York City-based Real Capital Analytics, Smith says the Tampa metro market showed second quarter weighted average cap rates of 6.9% for the CBD and 7.3% for the suburban submarkets. However, he cautions, "Market conditions vary widely within the submarkets, so it is difficult to generalize."