What Is a Cap Rate in Commercial Real Estate?

Capitalization rate (cap rate) is a standard metric in commercial real estate defined as net operating income divided by property value or purchase price. Investors use cap rates to compare assets and markets, implicit in yield when financing is not considered. AI valuation and underwriting tools calculate and stress cap rates across scenarios, but analysts must ensure NOI inputs reflect sustainable operations—not temporary anomalies. Cap rate compression or expansion signals changing investor return requirements in a market.