The higher the capitalization rate expected by an investor, the:

The reasoning behind expecting a higher capitalization rate is tied directly to the relationship between the rate and property value, specifically in the realm of investment real estate. The capitalization rate, often referred to as the "cap rate," is calculated by dividing the net operating income (NOI) of a property by its current market value or purchase price.

When an investor anticipates a higher capitalization rate, it suggests they are perceiving greater risk or uncertainty associated with that property. As a result, the investor will demand a higher return on their investment. Since the cap rate is inversely related to property value, an increase in the expected capitalization rate means the property value must decrease for the investment to yield the same return. In essence, if a property’s income remains constant, a higher cap rate signifies that the market values the property less, thereby correlating with reduced overall value.

In contrast, a lower capitalization rate indicates a lower perceived risk and can signify that properties are in greater demand, leading to higher values. This is a fundamental concept in real estate investment analysis and helps investors evaluate potential investment opportunities effectively.