CAGR (Compound Annual Growth Rate)
CAGR smooths out year-to-year volatility to show the constant annual growth rate that would transform a starting value into an ending value over a specific period.
What You Will Learn: You'll discover how CAGR smooths out volatility to reveal the true annual growth rate of an investment. Learn how to calculate CAGR, interpret it across different time periods, and use it to compare investments with varying risk profiles.
Definition
CAGR smooths out year-to-year volatility to show the constant annual growth rate that would transform a starting value into an ending value over a specific period. It's the gold standard for comparing growth rates across different investments and time periods.
Formula
CAGR = [(Ending Value / Beginning Value)^(1/Number of Years)] - 1Example Calculation
Starting NOI (Year 0): $100,000
Ending NOI (Year 5): $161,000
Time Period: 5 years
CAGR = [($161,000 / $100,000)^(1/5)] - 1
CAGR = (1.61)^0.20 - 1
CAGR = 10.0% Annual Growth Rate
Why CAGR Matters
Eliminates Noise
Smooths volatile returns into a single comprehensible number
Enables Comparison
Compare investments with different time horizons and volatility profiles
Forward Projection
Use historical CAGR to model future growth scenarios
Industry Standard
Universal metric for reporting long-term performance
Real Estate Sector Comparison (2000-2024)
| Sector | CAGR | Notes |
|---|---|---|
| Self-Storage* | 5.8% | *2005-2024 historical period |
| Industrial | 5.2% | E-commerce tailwind |
| MHC | 4.6% | Zero negative years; most consistent |
| Multifamily | 3.0% | Cyclical volatility |
| Retail | 0.8% | E-commerce headwind |
| Office | -1.2% | Structural decline |
Important Limitations
- Hides Volatility: Two investments with identical CAGR may have vastly different risk profiles
- Endpoint Sensitive: Starting and ending at peaks vs. troughs dramatically affects CAGR
- Assumes Reinvestment: Implies all gains are reinvested at the same rate
Critical Reminder
CAGR alone doesn't tell the full story. Always examine the path taken to achieve that CAGR—consistency matters as much as the final number.
Where to Find This on Our Site
See CAGR comparisons on our Research & Market Insights page, featuring:
- Long-Term Performance Comparison charts with CAGR by asset class
- 25-year historical CAGR data (2000-2024)
- Sector-by-sector CAGR analysis and rankings
Related Terms
Explore Historical Performance Data
See how different asset classes have performed over time with comprehensive CAGR analysis.
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