What is the Cap Rate?

While there are many questions investors have when considering commercial real estate, the one we receive most often is “what is the cap rate.”  The Capitalization Rate often referred to as the “Cap Rate” is a term we use to define the rate on net operating income for the first year of investment. This calculation does not take into account taxes or leverage. The Cap Rate allows for a quick “apples to apples” comparison between different types of properties as it pertains to what rate of return an investor can expect.  Since no two properties are 100% alike, the Cap Rate is only a starting point in the analysis of commercial income. Property type (Industrial, Office, Retail, Multi-Family), lease terms, location and a number of other factors must be evaluated to truly compare two or more investment opportunities.

Recent Cap Rate ranges this year, by property type:

  1. Single, National Tenant Buildings with 10-20 year leases – 5-7% Cap Rate
  2. Class A Retail Strip Centers – 7-7.5% Cap Rate
  3. Class B Retail Strip Centers – 8-9% Cap Rate
  4. Attractive Multifamily Properties – 6.5-8% Cap Rate
  5. Older Multifamily Properties with Deferred Maintenance) – 9-10% Cap Rate
  6. Mobile Home Parks (Mobiles Owned by Tenants) – 8-10% Cap Rate
  7. Mobile Home Parks (Mobiles Owned by Landlords) – 15% Cap Rate
  8. Recently Built Industrial Properties – 7-9% Cap Rate
  9. Older Industrial Properties – 9-10% Cap Rate
  10. Office Buildings (Full & Diverse Tenant Mix) – 8% Cap Rate

Now is a great time to purchase or sell income generating property. It’s good for buyers as they can borrow at historically low interest rates. Sellers also benefit from low interest rates as they can command higher prices on the sale of their property.

The key is to know how to measure the performance of the property. If you would like more information or assistance with the analysis of a property, give us a call at 406.656.2001.

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