Cap rates for commercial property: how income sets the price
Commercial buildings are priced on their income. Divide NOI by the market cap rate and you have a first estimate of value.
Updated Oct 29, 2026
Why commercial property is valued differently
A house is usually priced by comparing it to similar houses that sold nearby. A commercial building (retail, office, industrial, self-storage or apartments with five or more units) is priced mostly on what it earns. Buyers pay for the income, and the cap rate turns income into a price.
Value = NOI ÷ market cap rate
The market cap rate is the cap rate that similar properties in the area have recently sold at. It comes from sales data, brokers and appraisers, not from a formula.
A worked example
A 9,000 square foot retail strip with six tenants, listed at $1,700,000.
| Gross rent (all suites leased) | $190,000 |
|---|---|
| Vacancy and credit loss (7%) | −$13,300 |
| Effective gross income | $176,700 |
| Operating expenses | −$58,000 |
| Net operating income | $118,700 |
| Cap rate at the asking price ($118,700 ÷ $1,700,000) | 6.98% |
| Value at a 7% market cap rate ($118,700 ÷ 7%) | $1,695,714 |
The asking price is right in line with the market. If similar strips were selling at a 7.5% cap rate, the same income would be worth about $1,582,667, and the seller would be asking too much.
Small changes in NOI move the price a lot
At a 7% cap rate, every $1,000 of yearly NOI is worth about $14,286. If the buyer finds $5,000 of expenses the seller left out, the property is worth about $71,000 less. That's why commercial buyers check the rent roll, the leases and two or three years of expense history line by line.
What makes a cap rate higher or lower
- Tenant quality and lease length. A national tenant on a long triple-net lease means steadier income and a lower cap rate (a higher price).
- Property type. Each type has its own range. Offices with high vacancy usually trade at higher cap rates than well-leased industrial buildings.
- Location and condition. Strong areas and newer buildings mean lower cap rates.
- Interest rates. When borrowing costs rise, buyers usually need higher cap rates for deals to work, so prices tend to fall.
Cap rate is only the start
Cap rate ignores financing. Once you add a loan, look at cash-on-cash return and DSCR too. The commercial property calculator shows all of them, plus price per square foot and per unit to compare buildings of different sizes.
Frequently asked questions
- What is a good cap rate for commercial property?
- There's no single good number. Cap rates depend on the property type, location, tenants and interest rates. Compare a property's cap rate with recent sales of similar properties nearby; a cap rate well above the market usually means more risk, not a bargain.
- Are cap rates the same for retail, office and apartments?
- No. Each property type trades in its own range, and the ranges shift over time with rates and demand. Ask local commercial brokers or check recent sales of the same type.
- Should I use the seller's NOI to calculate the cap rate?
- Use it to start, then rebuild it yourself from the leases and expense history. Sellers often leave out management, reserves or vacancy, which makes the cap rate look higher than it is.
- Does a higher cap rate mean a better investment?
- Not always. A higher cap rate means more income per dollar of price, but it usually comes with more risk: weaker tenants, shorter leases, an older building or a weaker location.
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For education only. Not financial, tax or legal advice; talk to a qualified professional about your situation.