Cap rate compression is when cap rates decrease over time, increasing property values for the same NOI. LA multifamily compressed heavily 2020-2022, expanded 2023-2024, stabilized 2025-2026.
Because value equals NOI divided by cap rate, falling cap rates mean rising prices. A building generating $300,000 NOI is worth $6 million at a 5% cap rate and $7.5 million at a 4% cap — same NOI, different cap rate, different value.
Cap rates compress when interest rates fall, buyer pools deepen, or rent growth expectations increase. They expand when the opposite happens.
LA multifamily cap rate compression 2020-2022 moved Koreatown from ~5.2% to ~4.1% — a 110 basis point move worth roughly $1.4 million on a stabilized 20-unit building. The reverse expansion through 2023-2024 took much of that back. 2026 is largely a stabilization year, with mild compression on post-1995 and continued modest expansion on pre-1978 RSO inventory.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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