Capitalization rate sensitivity is powerful because it forces a direct confrontation between income assumptions and value assumptions. Many early acquisition stories appear attractive because the market capitalization rate entered into the model is only slightly more favorable than the realistic downside case. That slight difference can create a large value illusion.
A disciplined screen should therefore test value at multiple capitalization rates and compare those values to the true all-in basis, including closing cost and immediate capital expenditure. If the spread disappears quickly, the project may still be interesting, but it is not robust.
This matters even more when the asset requires near-term improvement spending, lease-up work, or repositioning. In those cases, purchase price alone is the wrong denominator. The relevant question is whether the stabilized property value can outrun total basis under both base and conservative assumptions.
What to carry forward
Sensitivity is not a presentation extra. It is part of basic intellectual honesty in underwriting.
Questions to ask next
- How much value disappears if the capitalization rate moves only modestly against the deal?
- Is the model comparing income to purchase price or to true all-in basis?
- Does the deal still create value after immediate corrective capital is included?