By Robert Mendieta Jr., CCIM — Associate Broker, Apex Real Estate Services · California DRE #01422904
Reviewed by Robert Mendieta Jr., CCIM (DRE #01422904) · Last updated: August 19, 2026 · Market benchmarks through Q2 2026, the latest complete quarter of published reports.
How Do You Calculate Cap Rate on a Commercial Property?
To calculate a cap rate, divide the property’s annual net operating income (NOI) by its purchase price, then multiply by 100. A building generating $65,000 of NOI that costs $1,000,000 carries a 6.5% cap rate ($65,000 ÷ $1,000,000). That example is illustrative math, not market data.
Knowing how to calculate cap rate is the fastest way to compare commercial properties — and the fastest way to get burned if the inputs are wrong. The division takes five seconds; the underwriting lives in two judgment calls: computing NOI correctly, and choosing the right market cap rate to compare against. This guide walks the formula step by step with two fully worked examples, shows real cap rates from published 2026 Inland Empire closings, lays out the current benchmark ranges with named sources, and covers the situations where a cap rate will actively mislead you.
Key Takeaways
- Cap rate = annual net operating income ÷ purchase price × 100. A $1,000,000 building with $65,000 of NOI trades at a 6.5% cap rate (illustrative math).
- NOI excludes debt service, income taxes, and capital expenditures. Get NOI wrong and the cap rate — and every value conclusion built on it — is wrong with it.
- Published 2026 Inland Empire industrial benchmarks: 6.0% average cap rate per Kidder Mathews (Q2 2026), 5.8% per NAI Capital (compressed from 6.7% a year earlier), and a 4.9% modeled market cap rate per CoStar (Q1 2026) — different methodologies, so never blend them.
- Coachella Valley market cap rates: 6.5% retail and 6.1% industrial, per CoStar Q1 2026.
- Real math from a real closing: Rialto Village sold for $40.3M at a 6.4% cap in September 2025, per CoStar — implying roughly $2.58M of NOI (price × cap rate, arithmetic).
- A cap rate is an unlevered snapshot — it ignores financing entirely. Pair it with cash-on-cash return and DSCR before you buy.
The Cap Rate Formula, Step by Step (Two Worked Examples)
Cap Rate = Net Operating Income (NOI) ÷ Purchase Price × 100
The cap rate (capitalization rate) expresses a property’s annual income as a percentage of its price — the yield the building itself produces before any loan. It needs exactly two inputs: the annual net operating income and the price. Because the formula is simple algebra, it rearranges into three working tools:
- Cap rate = NOI ÷ price. “What yield am I buying at this price?”
- Value = NOI ÷ cap rate. “What is this income stream worth at the market’s yield?”
- NOI = value × cap rate. “What income does that asking price assume?”
Worked Example 1 · Illustrative numbers, not market data
A small industrial building is offered at $1,000,000. Its verified annual NOI is $65,000. Cap rate = $65,000 ÷ $1,000,000 = 0.065 = 6.5%. If comparable buildings in the submarket have been trading closer to a 6.0% cap, the same $65,000 of income would support a value of $65,000 ÷ 0.06 ≈ $1,083,000 — so the asking price is slightly below what the market yield implies. That gap, not the raw percentage, is the actionable information.
Worked Example 2 · From rent roll to cap rate (illustrative)
A multi-tenant retail strip is listed at $2,400,000. Build the NOI from the top down:
| Line item | Annual amount |
|---|---|
| Scheduled gross income (rent + reimbursements) | $210,000 |
| Less vacancy & credit allowance (5%) | −$10,500 |
| Effective gross income | $199,500 |
| Less operating expenses (taxes, insurance, CAM, management, maintenance) | −$55,500 |
| Net operating income (NOI) | $144,000 |
Cap rate = $144,000 ÷ $2,400,000 = 6.0%. Now flip the formula to see why small yield moves matter: at a 5.5% market cap rate, the identical $144,000 income stream is worth $144,000 ÷ 0.055 ≈ $2,618,000. Half a point of cap rate moved the value by roughly $218,000 — about 9% — without the property changing at all.
Getting NOI Right: What Goes In, What Stays Out
Net operating income is the property’s total income minus its operating expenses, calculated before debt service, income taxes, and capital expenditures. Every cap rate you have ever seen quoted assumes that definition, so any deviation quietly breaks comparability. Most bad cap rates aren’t math errors — they are NOI errors.
What belongs in NOI
- All property income: scheduled base rent, expense reimbursements from tenants, and other income such as signage or storage. How much expense the tenants reimburse depends on the lease structure — see the Apex guide to types of commercial leases and how CAM charges are billed.
- A vacancy and credit-loss allowance, even in a fully occupied building — buyers underwrite the income as durable, not perfect.
- Operating expenses: property taxes, insurance, utilities, repairs and maintenance, management fees, and CAM-type costs of running the property.
What never belongs in NOI
- Debt service. Mortgage payments depend on the buyer’s loan, not the building. Leaving debt out is what makes cap rates comparable between an all-cash buyer and a leveraged one.
- Income taxes and depreciation. Owner-specific, not property-specific.
- Capital expenditures, tenant improvements, and leasing commissions. Roofs, HVAC replacements, and deal costs sit below the NOI line — which is why two buildings with identical NOI can produce very different actual cash flow.
Two California-specific habits protect you here. First, underwrite from actuals, not the seller’s pro-forma — trailing-12 statements, the rent roll, and real tax and insurance bills. Second, remember that California generally reassesses property taxes when a building sells: recompute the tax line at your purchase price, not the seller’s current bill, or your day-one NOI will be overstated before you even close.
Real Cap Rate Examples: 2026 Inland Empire Sale Comps
Formulas teach mechanics; closings teach pricing. The sales below are real transactions reported in CoStar’s Q1 2026 Inland Empire Retail and Industrial Capital Markets reports, spanning Riverside County and San Bernardino County — the two counties that make up the Inland Empire. The implied NOI column is our arithmetic back-out (price × cap rate, rounded), shown so you can see the formula working on real numbers.
| Sale (per CoStar, Q1 2026 reports) | Price | Cap rate | Implied NOI (arithmetic) |
|---|---|---|---|
| Citrus Crossroads, Fontana — 54,000 SF, Amazon Fresh-anchored (Apr 2025) | $17.8M ($331/SF) | 5.4% | ≈$961,000 |
| 526,000 SF warehouse, San Bernardino — single tenant (Kohl’s), ~4.5 years of term (Dec 2025) | $123M ($234/SF) | 5.75% | ≈$7.07M |
| Rialto Village, Rialto — Sprouts-anchored, built 2023 (Sept 2025) | $40.3M ($353/SF) | 6.4% | ≈$2.58M |
| Westgate Plaza, Riverside — 63,000 SF, four-building portion (Jul 2025) | $11.25M ($177/SF) | 7.0% | ≈$788,000 |
Read the spread, not just the numbers. The same region, in the same year, priced income anywhere from a 5.4% to a 7.0% cap. The Amazon Fresh-anchored Fontana center and the Kohl’s-leased warehouse traded tightest — strong tenancy and newer, institutional-grade real estate. The 2023-built, Sprouts-anchored Rialto Village cleared at 6.4%, and the four-building Westgate Plaza portion in Riverside — at $177/SF, roughly half the per-foot pricing of the Fontana comp — required a 7.0% yield to clear. Perceived durability of the income is what buyers are actually pricing.
Context for how liquid this market is: CoStar’s Q1 2026 retail report counted $1.7 billion of 2025 Inland Empire retail sales — a three-year high — with most 2025 deal cap rates ranging from the low-5% to mid-6% area. If someone quotes you “the Riverside County cap rate,” ask which product, which vintage, and which tenancy — the comps above show why a single number doesn’t exist.
Cap Rate Benchmarks for 2026: Inland Empire and Coachella Valley
Publishers measure cap rates differently, so the honest way to benchmark is a table with named sources — never one blended number. CoStar’s “market cap rate” is a modeled estimate across all inventory, while Kidder Mathews and NAI Capital report averages of what actually transacted. Both are useful; they answer different questions.
| Segment | Published cap rate | Source · period |
|---|---|---|
| IE industrial — average of sales | 6.0% (avg sale price $191.56/SF) | Kidder Mathews · Q2 2026 |
| IE industrial — average of sales | 5.8%, compressed from 6.7% a year earlier | NAI Capital · H1 2026 |
| IE industrial — modeled market cap rate | 4.9%; 12-mo transactions averaged 5.7% (range 3.8%–7.6%) | CoStar · Q1 2026 |
| IE industrial — core, 4 & 5 Star product | Roughly 4.7%–5.0% (chart-derived, approximate) | CoStar pricing charts · Q1 2026 |
| IE retail — modeled market cap rate | 6.4%; 12-mo transactions averaged 5.8% | CoStar · Q1 2026 |
| IE retail — neighborhood centers | Above 6% on average since 2024 (pricing near $320/SF) | CoStar · Q1 2026 |
| Coachella Valley retail | 6.5% market cap rate | CoStar · Q1 2026 |
| Coachella Valley industrial | 6.1% market cap rate | CoStar · Q1 2026 |
Why the numbers sit where they do: per CoStar’s Q1 2026 report, cap rates on Inland Empire logistics-building sales over $10 million rose roughly 150 basis points — from a 4% average in 2021–22 to the mid-5%-to-6% range — as average pricing for those buildings fell from a roughly $300/SF peak in 2022 to under $250/SF. At the same time, capital is clearly back: NAI Capital measured $1.64 billion of first-half 2026 IE industrial dollar volume, up 75.3% year over year, with average caps compressing from 6.7% to 5.8%. On the retail side, CoStar notes single-tenant net-leased assets command tighter yields in the roughly 5% range — the credit-and-lease-term effect explained in our triple net (NNN) lease guide.
The income side of the same equation matters just as much: what a building earns in rent drives its NOI. For the current rent picture, see our companion guide to warehouse space costs in the Inland Empire, the Coachella Valley market hub (where the CV figures above are published with full context), and the quarterly Apex market reports.
What Moves a Cap Rate Up or Down
Five forces explain most cap-rate movement, and the 2026 comps above illustrate each of them:
- Interest rates and the cost of debt. Cap rates compete with what investors can earn elsewhere and with what borrowing costs. When debt got expensive after 2022, IE logistics cap rates reset upward by roughly 150 basis points, per CoStar’s Q1 2026 report.
- Tenant credit and lease term. Durable, contractual income prices tighter — the single-tenant Kohl’s warehouse at 5.75% and CoStar’s roughly-5%-range single-tenant net-lease yields both show the credit effect.
- Asset quality. CoStar’s Q1 2026 pricing charts put core 4 & 5 Star IE industrial at roughly 4.7%–5.0%, tighter than the 4.9%–5.7% all-market measures — newer, better-located buildings carry lower yields.
- Location and supply pipeline. Scarce, hard-to-replace product holds value; commodity product in oversupplied pockets needs a higher yield to attract buyers.
- Rent-growth expectations. Buyers accept a lower going-in yield when they believe income will grow — and demand a higher one when rents look flat or exposed.
Remember the inverse relationship: lower cap rate = higher price per dollar of income. Illustrative math: $100,000 of NOI is worth $2,000,000 at a 5% cap but only about $1,430,000 at 7%. When brokers say “cap rates rose,” they are saying values fell — same sentence, opposite directions.
Cap Rate vs. Cash-on-Cash Return vs. DSCR
The cap rate is deliberately blind to financing. Two other metrics complete the picture, and serious buyers run all three on every deal:
| Metric | Formula | What it answers | What it ignores |
|---|---|---|---|
| Cap rate | NOI ÷ purchase price | The building’s unlevered yield — comparable across buyers | Financing, CapEx, future rent growth |
| Cash-on-cash return | Annual pre-tax cash flow (after debt service) ÷ cash invested | What your actual equity is earning each year | Principal paydown, appreciation, taxes |
| DSCR | NOI ÷ annual debt service | The lender’s question: does income cover the loan, with margin? | Returns entirely — it is a safety test, not a yield |
Carry Worked Example 2 forward (still illustrative): buy the $2,400,000 center at its 6.0% cap with a $1,560,000 loan and $840,000 of cash. If annual debt service is $115,000, DSCR = $144,000 ÷ $115,000 = 1.25× — the property earns 25% more than its loan payments require, the kind of cushion CRE lenders commonly look for. Cash flow after debt is $144,000 − $115,000 = $29,000, so cash-on-cash return = $29,000 ÷ $840,000 ≈ 3.5%. Same building, same 6.0% cap rate — but the levered equity yield tells a very different story. That is exactly why no single metric should ever approve a deal alone.
When a Cap Rate Misleads You
Value-add and vacant properties
A half-vacant building has depressed in-place NOI, so its going-in cap rate looks terrible precisely when the opportunity is best. Value-add buyers underwrite two numbers — the going-in cap on today’s income and the stabilized cap on projected income after lease-up — and the spread between them is the business plan. Quoting either one alone misrepresents the deal.
Owner-user buildings
If you plan to occupy the building yourself, there is no arm’s-length income stream to capitalize — a cap rate on your own rent is circular. Owner-users compare total occupancy cost against leasing, sale comps on a per-square-foot basis, and replacement cost instead. Browse current Apex listings for sale if that is your situation.
Pro-forma cap rates
Marketing packages often quote a cap rate on projected income — market-rate rents the building does not yet collect, expenses trimmed to best case. Always ask whether a quoted cap rate is on actual trailing income or a pro-forma, and re-run the formula on actuals before you rely on it.
Lease rollover hiding inside the yield
A high cap rate on a center where half the leases expire next year is not a bargain — it is rollover risk being priced. Conversely, buyers paid 5.75% for the Kohl’s-leased San Bernardino warehouse with about 4.5 years of term remaining, per CoStar — the market judged that specific income durable. The cap rate compresses or widens with the story behind the rent roll, so read the leases, not just the ratio.
One-time items and looming CapEx
A year of deferred-maintenance catch-up understates NOI; a year with no repairs overstates it. And because capital expenditures sit below the NOI line, a building facing a roof and HVAC cycle can show the same cap rate as one that just completed them — while delivering far less actual cash. Normalize the operating history and budget CapEx separately.
How a CCIM Underwrites Beyond the Cap Rate
Everything above is the starting point of professional underwriting, not the end of it. Robert Mendieta Jr., CCIM — Associate Broker at Apex Real Estate Services, DRE #01422904 — holds the CCIM designation, which requires graduate-level coursework in financial, market, and investment analysis plus a documented portfolio of qualifying transactions. When Apex underwrites a listing or an acquisition, the process runs: verify in-place NOI from actuals, reassess the tax line at the contemplated price, benchmark against product-specific published cap rates like the table above, then stress the result against rollover, credit, CapEx, and debt scenarios.
That is the math behind every pricing opinion we issue across the Inland Empire and Coachella Valley — from Inland Empire industrial to Palm Springs commercial. If you are pricing a building to sell, or testing whether an asking price pencils, we will run the numbers with you before you commit.
Cap Rate FAQ
What is the formula for cap rate?
The cap rate formula is net operating income divided by purchase price, multiplied by 100. For example, a commercial building with $65,000 of annual NOI bought for $1,000,000 has a 6.5% cap rate (illustrative math). The same formula rearranges to estimate value: NOI divided by the market cap rate.
What is a good cap rate for commercial property?
A good cap rate depends on the property type, location, tenant credit, and lease term — there is no single correct number. Lower cap rates mean investors are paying more for each dollar of net operating income, which usually signals lower perceived risk. For orientation, Kidder Mathews reported a 6.0% average Inland Empire industrial cap rate in Q2 2026, and CoStar’s Q1 2026 market cap rates were 6.5% for Coachella Valley retail and 6.1% for Coachella Valley industrial. Compare a property against recent sales of similar buildings in the same submarket before judging it.
Does the cap rate include mortgage payments?
No. A cap rate is an unlevered metric: net operating income is calculated before debt service, so the cap rate describes the property’s yield as if it were purchased with all cash. To see how financing changes the picture, investors pair the cap rate with cash-on-cash return, which measures the equity’s yield after loan payments, and DSCR, the lender’s test of whether income covers the debt.
How do you calculate NOI for a cap rate?
Start with all property income — scheduled rent, tenant expense reimbursements, and other income — subtract a vacancy and credit-loss allowance, then subtract operating expenses such as property taxes, insurance, utilities, maintenance, management, and CAM. Do not subtract mortgage payments, income taxes, capital expenditures, or depreciation; those sit below the NOI line and would corrupt the cap rate.
What does a 6% cap rate mean?
A 6% cap rate means the property’s annual net operating income equals 6% of its price — $60,000 of NOI on a $1,000,000 purchase (illustrative math). Read it as the first-year unlevered yield the building itself produces before any loan. A lower cap rate means a higher price per dollar of income; a higher cap rate usually signals more perceived risk or less durable income.
How do you value a commercial property using a cap rate?
Divide stabilized annual NOI by the market cap rate for comparable buildings: Value = NOI ÷ cap rate. A property with $144,000 of NOI valued at a 6.0% market cap rate is worth $2,400,000; at 5.5%, the same income is worth about $2,618,000 (illustrative math). Because small cap-rate movements swing value materially, selecting the right comparable set matters more than the arithmetic.
What were commercial cap rates in the Inland Empire in 2026?
Published figures vary by methodology, so always name the source. Kidder Mathews reported a 6.0% average Inland Empire industrial cap rate in Q2 2026; NAI Capital reported 5.8%, compressed from 6.7% a year earlier. CoStar’s Q1 2026 modeled market cap rates were 4.9% for IE industrial (with 12-month transactions averaging 5.7%) and 6.4% for IE retail, with Coachella Valley at 6.5% retail and 6.1% industrial. The different measures answer different questions and should never be blended into one number.
Get a CCIM’s Underwriting on Your Next Deal
Apex Real Estate Services represents buyers, sellers, and owners across the Inland Empire and Coachella Valley. Robert Mendieta Jr., CCIM — Associate Broker, DRE #01422904 — will verify the NOI, benchmark the cap rate against current published comps, and tell you what the number is really saying before you commit.
Call Robert: (951) 977-3251Or request a free CRE consult with the form below.
Sources: CoStar Inland Empire Industrial and Retail Capital Markets reports (Q1 2026), including reported sale comps and modeled market cap rates; Kidder Mathews Inland Empire Industrial Market Report (Q2 2026); NAI Capital Inland Empire Industrial Report (H1 2026); CoStar Q1 2026 Coachella Valley figures as published on the Apex Coachella Valley market hub. Every market figure is attributed to its publisher and period in-text; publisher methodologies differ and are never averaged. Worked examples labeled illustrative are hypothetical arithmetic, not market data, and implied-NOI figures are arithmetic back-outs (price × cap rate). Nothing here is investment advice or an offer.
Robert Mendieta Jr., CCIM · Associate Broker · DRE #01422904 · Apex Real Estate Services · 3750 E. Florida Ave Suite A, Hemet, CA 92544 · (951) 977-3251 · Joseph Lombera, Commercial Agent + CMO, DRE #01971957. Reviewed by Robert Mendieta Jr., CCIM (DRE #01422904). Last updated: August 19, 2026.