How does a decrease in the capitalization rate affect an asset's value?

A decrease in the capitalization rate (cap rate) is significant in valuing income-generating properties. The cap rate is calculated by dividing the net operating income (NOI) of the asset by its current market value. When the cap rate decreases, it indicates that investors are willing to accept lower returns relative to the income the property generates.

This shift often reflects a more favorable opinion about the asset’s risk or an increase in market demand, suggesting competition for properties in that sector. As a result, if the cap rate declines and the NOI remains stable, the value of the asset will increase, potentially growing faster than the NOI itself if the cap rate change is significant compared to NOI growth.

Essentially, a decreasing cap rate implies that the asset is becoming more valuable, showcasing improved market conditions or investor sentiment. Thus, it correctly suggests that the asset's value will grow faster than its NOI, which aligns perfectly with the reasoning behind this option.