Same cap rate sensitivity and price per square foot?
This is a hypothetical question. Could a scenario like this exist and how would it affect a property's cap rate?

Let's say we have two industrial buildings in the same area each with 10,000 square feet of space. Property 1 has annual rent of $10/sqft or $100,000 and Property 2 has annual rent of $15/sqft or $150,000. They are both valued at a 5% cap rate so Property 1 is $2.0mm and Property 2 is $3.0mm.

1. When would a scenario like this make sense, if ever? 
2. Could Property 2 have a nicer facility and therefore command higher rent but still be valued at a market cap rate of 5% similar to Property 1?  Or would it make more sense that Property 2 has a lower cap rate than Property 1 because it is nicer?
3. If Property 2's rent decreased, what would you expect to happen to the cap rate or market value of Property 2? It seems obvious the market value would decline but I'm not sure how the cap rate would change.

I'm asking because I'm trying to think through a scenario where you buy a property with higher NOI   
 per square foot for a reasonable cap rate but the tenant leaves and you can't re-lease it at the premium rate. I would guess that all the extra value comes from the higher rent/sqft but are there other factors to consider?
[{"id": "iq4z5yf", "text": "In practice it sounds like Property 1 is either inferior (older / lower clear height / lower quality design) OR it was just leased when lease rates were lower.  If it's the former then property 1 should have a higher cap rate then property 2 because in a weak market its a flight to quality.\n\nIf it's the latter, then the buildings in practice are more similar and deserve a similar cap rate.  But you do need to do an NPV to account for rent upon releasing.\n\nYou do bring up a good point that Property 2 could have 'over and above' improvements that nobody else would pay for, in that case you don't want to attribute value to that other than for the remaining lease term.  \n\nA better way to approach this is by A) Applying a higher cap rate to the inferior building and B) Determining what the spaces would lease for if they were vacant now.  Value them based on todays lease rates with an adjustment for the term remaining.  For example if the $10/ft space has 2yrs left then subtract the discounted value of the delta between in-place and market rents over those two years.", "replies": [], "depth": 1}, {"id": "iq5b3qd", "text": "If the properties are comparable they should sell for comparable cap rates.  The difference in rents would prolly be attributed to the timing of the leases.\n\nRemember that direct capitalization is just a snapshot in time generally looking at financials over a one year time.  \n\nThe cap rate is determined by the market.  If the market rate stays the same then changes in NOI affect the value, not the cap rate.\n\nBut if leases are short term then you would account for over or below market leases that will go to market rate soon.\n\nAlso, direct capitalization measures NOI not gross rents so your rent per sf is not the NOI.", "replies": [], "depth": 1}, {"id": "iq5r0pt", "text": "Thank you both for the thoughts. At the end of the day lease rate and time left on the lease seem to be the biggest driver of property value. Having a nicer property might increase the value but you need to see that come in the form of higher rent.", "replies": [], "depth": 1}, {"id": "iq6aqn0", "text": "1) When it exists.\n\n2) The cap rate is the valuation mathematics placed on an asset either by the buyer, or the seller.\n\n3) See #2.", "replies": [], "depth": 1}, {"id": "iq6cc4i", "text": "Have to consider the credit of the tenant too.  A fedex tenant that\u2019s been there a while is a lower cap then some local business, even if lease term is identical.", "replies": [{"id": "iq6fqbf", "text": "Great point!", "replies": [{"id": "iq6va3x", "text": "Ya know what?  Generally a Class and Asset type will attract  a similar tenant.  Sometimes a lesser quality tenant will be given a short term lease to fill in.  Think Spirit Store.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iq6d0r8", "text": "U/lurrrkin  taking the day off?  WWCGD.  What would Commissioner Gordon do?  LOL", "replies": [], "depth": 1}]