Commercial Cap Rate Calculator Formula

Understand the math behind the commercial cap rate calculator. Each variable explained with a worked example.

Use the Commercial Cap Rate Calculator

Formulas Used

Current Cap Rate

current_cap_rate = cap_rate

Implied Value at Target Cap

implied_value = implied_value_at_target

Value Difference

value_difference = implied_value_at_target - property_value

Price Per $1 of NOI

per_noi_dollar = net_operating_income > 0 ? property_value / net_operating_income : 0

NOI Needed for Target Cap at Current Price

noi_increase_for_target = property_value * target_cap_rate / 100

Variables

VariableDescriptionDefault
net_operating_incomeNet Operating Income (NOI)(USD)120000
property_valueProperty Value / Sale Price(USD)1500000
target_cap_rateTarget Cap Rate for Comparison(%)7
cap_rateDerived value= property_value > 0 ? (net_operating_income / property_value) * 100 : 0calculated
implied_value_at_targetDerived value= target_cap_rate > 0 ? net_operating_income / (target_cap_rate / 100) : 0calculated

How It Works

Commercial Cap Rate Analysis

The cap rate is the primary valuation metric for commercial real estate. It represents the unlevered yield an investor receives based on the property's income production.

Formula

Cap Rate = Net Operating Income / Property Value x 100

Implied Value = NOI / Cap Rate

Cap Rate Ranges by Property Type

  • Class A Office: 5-7%
  • Retail (NNN): 5-7%
  • Industrial/Warehouse: 5-8%
  • Multifamily (Class A): 4-6%
  • Multifamily (Class C): 6-9%
  • Self-Storage: 5-8%

    • Cap Rate Compression

    When cap rates compress (decrease), property values increase for the same NOI. This happened broadly from 2010-2022 due to low interest rates. Rising interest rates generally cause cap rates to expand.

    Worked Example

    A commercial property with $120,000 NOI listed at $1,500,000, compared against a 7% target cap rate.

    net_operating_income = 120000property_value = 1500000target_cap_rate = 7
    1. 01Current cap rate: $120,000 / $1,500,000 = 8.00%
    2. 02Implied value at 7% cap: $120,000 / 0.07 = $1,714,286
    3. 03Value difference: $1,714,286 - $1,500,000 = $214,286
    4. 04Price per $1 of NOI: $1,500,000 / $120,000 = $12.50
    5. 05NOI needed for 7% cap at current price: $1,500,000 x 7% = $105,000

    Ready to run the numbers?

    Open Commercial Cap Rate Calculator