The capitalization rate, or cap rate, is the ratio of a property's net operating income to its value or price. It expresses the unleveraged annual return a buyer would earn if they paid all cash. A $1,000,000 property with $70,000 in NOI trades at a 7% cap rate.
Cap rates move with asset type, location, and interest rates. In 2026, stabilized multifamily and industrial often trade in the 5.5 to 6.5% range, while retail, hospitality, and secondary markets run higher, roughly 7 to 8%. Lower cap rates signal higher prices and lower perceived risk.
Investors flip the formula to estimate value: divide NOI by a market cap rate. This is the income approach appraisers rely on for commercial property, which is why a small shift in the cap rate can swing value by hundreds of thousands of dollars.