Commercial real estate analysis starts with one number: the capitalization rate. Every CRE investor, broker, and lender uses it. This guide shows you exactly how to calculate it, what it means, and what benchmarks to use in 2026.
What Is Cap Rate?
The capitalization rate (cap rate) measures the expected annual return on a commercial property, assuming an all-cash purchase. It strips out financing, tax effects, and appreciation — giving you a clean, comparable yield.
Formula:
Cap Rate = Net Operating Income (NOI) / Property ValueOr flipped to solve for value:
Property Value = NOI / Cap RateHow to Calculate It: Step by Step
Step 1: Calculate Gross Rental Income Add up all annual rents across all tenants or units at 100% occupancy.
Step 2: Apply Vacancy & Collection Loss Subtract an estimated vacancy factor. For most CRE assets, 5–10% is standard; office may run higher in 2026 given hybrid work patterns.
Step 3: Calculate Effective Gross Income (EGI) EGI = Gross Rental Income × (1 − Vacancy Rate)
Step 4: Calculate Net Operating Income (NOI) Subtract all operating expenses from EGI:
- Property taxes
- Insurance
- Property management (typically 4–8% of EGI)
- Maintenance and repairs
- Utilities (if landlord-paid)
- Reserves for capital expenditures
What NOI does NOT include: mortgage payments, depreciation, income taxes, or capital improvements.
Step 5: Divide NOI by Purchase Price
Cap Rate = NOI / Purchase PriceWorked Example
A 10,000 sq ft industrial building in Dallas, TX:
| Item | Amount |
|---|---|
| Gross Rent (NNN lease) | $120,000 / yr |
| Vacancy (5%) | −$6,000 |
| Effective Gross Income | $114,000 |
| Operating Expenses | −$18,000 |
| Net Operating Income | $96,000 |
| Purchase Price | $1,600,000 |
| Cap Rate | 6.0% |
A 6.0% cap rate on an NNN industrial asset in Dallas is in line with the 5.5–6.5% range for stabilized industrial in secondary Sun Belt markets in 2026.
2026 Cap Rate Benchmarks by Property Type
Based on CBRE Q4 2025 data and 2026 YTD transactions:
| Property Type | Low | High | Key Driver |
|---|---|---|---|
| Industrial (Class A) | 5.0% | 6.0% | E-commerce demand, limited supply |
| Industrial (Class B/C) | 6.0% | 7.5% | Aging stock, capex risk |
| Multifamily (Class A) | 4.5% | 5.5% | Rent growth moderating |
| Multifamily (Class B) | 5.5% | 6.5% | Value-add premium priced in |
| Retail (Necessity-based) | 6.0% | 7.5% | Grocery-anchored outperforms |
| Retail (Strip/Power) | 7.0% | 8.5% | Internet exposure, higher risk |
| Office (Class A CBD) | 7.0% | 8.5% | Occupancy uncertainty |
| Office (Suburban) | 8.0% | 10.0%+ | Conversion risk priced in |
| Self-Storage | 5.5% | 7.0% | Demand resilience |
| Net Lease (Investment Grade) | 5.0% | 6.5% | Long WALT, credit tenants |
Source: CBRE Cap Rate Survey, CoStar 2025 Annual, JLL Research.
What Moves Cap Rates
Interest Rates: The 10-year Treasury is the benchmark. When rates rise, cap rates follow (eventually). In 2026, the 10-year sits around 4.5%, which keeps many property types under cap rate compression pressure.
Market Conditions: Primary markets (NYC, LA, SF) compress cap rates 50–150 bps vs. secondary/tertiary. Denver, Phoenix, and Nashville industrial assets now trade within 50 bps of gateway markets.
Lease Structure: NNN leases (tenant pays taxes, insurance, maintenance) command 50–100 bps lower cap rates than gross leases because the landlord's cost exposure is nearly zero.
Tenant Credit: A Walgreens or Amazon single-tenant NNN commands sub-5% cap rates. A local pizza shop in the same building trades at 7%+.
Lease Term Remaining: A 12-year term trades at a premium to a 3-year term. Rollover risk is priced in.
Cap Rate vs. Other Metrics
| Metric | What It Measures | When to Use |
|---|---|---|
| Cap Rate | Unlevered income yield | Compare properties, set value |
| Cash-on-Cash | Levered return on equity | Evaluate financing structure |
| Gross Rent Multiplier | Price / gross rents | Quick screen; less precise |
| IRR | Total return over hold period | Full investment underwriting |
| Debt Service Coverage | NOI / Annual Debt Payments | Lender underwriting |
How AI Tools Are Changing CRE Analysis
Modern CRE investors use AI advisors to run comp analysis across markets in minutes. Stack Network's Business Advisor can pull sector benchmarks, compare cap rates across 18 verticals, and flag where spreads vs. risk-free rates are compressing or expanding. The days of building this manually in Excel are ending.
See also: CRE Cap Rates in 2026: Industrial 5.5–6.5%, Office 7.5–9.5% and Business Formation by Industry.
Bottom Line
Cap rate is a tool, not a verdict. A 6% cap rate in a primary industrial market beats a 9% cap rate in a tertiary office market any day — the numbers only mean something in context. Use the formula, benchmark against current data, and stress-test your NOI assumptions before you underwrite any deal.
Start your CRE analysis with Stack Network's Startup Costs tool to understand all-in capital requirements by vertical.