Why is the terminal cap rate typically higher than the going-in cap rate?

The terminal cap rate being typically higher than the going-in cap rate is primarily due to the fact that it accounts for expected market risks over time. The going-in cap rate reflects a property's current income relative to its purchase price at a specific point in time, often influenced by factors such as its location, current market conditions, and operational efficiency.

In contrast, the terminal cap rate is utilized at the end of a holding period to estimate the property's value based on projected income. This higher rate incorporates the various risks that investors may anticipate over the duration of ownership, including economic fluctuations, potential changes in property management efficiency, and shifting demand in the market. The increased uncertainty related to future performance leads to a more conservative estimate of value, captured in the higher terminal cap rate compared to the going-in cap rate.

The other options miss the mark because they do not capture the essence of risk assessment over time. The potential increase in property value or historical income can influence perceptions of value but do not directly relate to the inherent market risks that the terminal cap rate seeks to quantify. Location plays a role in both cap rates, but it alone does not lead to the general expected increase in the terminal cap rate.