Where:

MV = estimated market value

NOI = the net operating income from a real estate investment.

r = the rate that equity investors require from a real estate investment.

g = the growth rate of NOI (assumed to be constant).

C = r – g = the market capitalization rate.

From this relationship, we see that: 

• as the growth rate of NOI increases, capitalization rates decline and value estimates will rise,
• the capitalization rate is the spread between r and g. Thus, as the spread widens, value estimates decline, and
• holding r constant, value is directly related to g.

The effect of inflation on value estimates depends on its combined effect on the required return (r) and the growth rate (g). If the net result is to decrease (increase) the capitalization rate, value estimates will rise (fall).