Capitalization Rate
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Key Takeaways
- Capitalization rate is a valuation and pricing metric. It is often used to compare investment opportunities but is not fully comparable across property types and geographies, where risk, growth expectations, and market conditions differ.
- Cap rate does not account for financing, capital structure, or property-specific factors, and may not fully reflect changing market dynamics.
- It generally assumes stabilized income and expenses, which can understate value-add upside or near-term leasing risk.
What is capitalization rate?
Capitalization rate, often referred to as the cap rate, is a key pricing metric in real estate investment. It is calculated by dividing a property's net operating income (NOI) by its current market value or purchase price. Cap rate may be calculated using either trailing NOI (the prior 12 months) or forward NOI (the next 12 months); forward NOI is the more common convention in acquisition pricing.
How do I find out what the implied cap rate for REITs is?
Nareit's Quarterly REIT Performance Tracker, a measure of the U.S. listed REIT industry's operating performance and balance sheet metrics, reports implied cap rates for REITs based on reported NOI and enterprise value. Enterprise value reflects the total market value of a REIT, iincluding equity market capitalization plus debt, less cash.