Industrial Cap Rate Calculator
Cap rates are frequently used by commercial real estate investors. Find out the capitalization rate of any potential investment with our calculator.
What Is a Cap Rate?
Cap rates — or capitalization rates — are calculations commonly used in commercial real estate investment to identify and compare rates of return across properties. Expressed as a percentage, a cap rate compares an asset’s net operating income with the property’s value. Depending on the approach, the property’s value can be either its assessed market value or its sale price.
Why Are Cap Rates Important?
Capitalization rates are important because they enable investors and property owners to easily compare their properties’ rates of return with other potential investments. This comparison, though imperfect, can help identify an investment’s risk and potential return compared to other assets. Appraisers, too, can use cap rates to determine a property’s market value.
How to Calculate a Cap Rate
To determine an investment’s cap rate, there are two figures you must have: the asset’s net operating income and its market value.
An industrial property’s net operating income is its total income, excluding the operating expenses. That means you’ll need to include rental income as well as any other revenue the building generates. This could include vending machine income, trailer parking fees, and other ancillary income.
If you are looking to buy an industrial property, the asset’s sale price can generally be used as its market value. Note, however, that using the sale price approach is far less meaningful if the transaction is not recent or if is a non-arm’s length deal. In those cases, it may be best to utilize recent comparative sales (looking at those with similar quality and characteristics within the same asset class) to ascertain an approximate market value.
Cap Rate Formula
The formula to calculate a cap rate is below:
Cap Rate = Net Operating Income ÷ Property’s Market Value
Cap Rate Calculator
Plug in your figures to the calculator below to determine the cap rate of any investment.
Cap Rate Calculation Example
Let’s find the cap rate of an industrial property to highlight how the calculation works. We’ll say that you want to buy an industrial asset in Charlotte, N.C., and you are considering two potential properties. A 100,000-square-foot structure — Building A — is on the market for $10 million and boasts a net operating income of $300,000 per year.
Cap Rate – Building A = $300,000 ÷ $10 million
Cap Rate – Building A = 3.0%
Meanwhile, a much smaller Building B is selling for $1 million. You calculate from the asset’s financials that the NOI is $60,000 per year. Let’s calculate this below.
Cap Rate – Building B = $60,000 ÷ $1 million
Cap Rate – Building B = 6.0%
In this example, Building B has a significantly higher cap rate at 6%. Does this mean it’s the better investment? Not necessarily.
Cap Rate Limitations
Remember: A cap rate is only a very high-level metric, and it is not a perfect indicator of an investment’s profitability. Future net operating income may be difficult to accurately project, and a property with a low market value may indicate an inferior location or building quality. In the above example, Building A may be located next to the market’s airport or alongside a major highway, which drives its market value up — and cap rate down. Alternatively, Building B may be located in the middle of nowhere, or it could be aging and in need of significant renovation to compete with newer inventory.
Beyond comparing investments, cap rates also do not offer a comprehensive view of an industrial property’s returns. After all, few assets maintain complete income stability over the term of an investment: Leases expire, capital improvements are required, and changes in market conditions could impact a building’s future performance. While industrial properties utilizing triple-net leases may have more predictable returns due to the lower operational costs, future vacancy costs must not be overlooked.
For all of these reasons, it’s best not to rely exclusively on cap rates when making investment decisions. They may often offer a good high-level view of investment opportunities within a market at the present time, but a more nuanced look is essential before choosing to invest.
Do Lenders Look at Cap Rates?
While capitalization rates are generally considered the most useful for investors, they can be informative metrics for lenders to look at when underwriting an industrial property loan. Because higher cap rates are often associated with higher degrees of risk, a lender may assess a property through this lens, particularly if the borrower is not an experienced commercial real estate owner or operator.