What Is a CAP Rate?
A capitalization rate (CAP rate) measures the annual return on an income-producing property, calculated as:
CAP Rate = Net Operating Income ÷ Purchase Price
It helps investors compare properties on an apples-to-apples basis. In Southern Utah, CAP rates currently range:
-
Office: 6.0–7.0%
-
Retail: 5.5–6.5%
-
Industrial: 6.0–7.5%
Interpreting CAP Rates
A lower CAP rate often signals lower perceived risk (e.g., newer Class A retail), while higher CAP rates may reflect secondary markets or value-add potential.
Example:
A building producing $120,000 in NOI and trading at a 6.5% CAP is worth about $1.846M.
If CAP compresses to 6.0%, value increases to $2.0M—demonstrating how market perception drives pricing.
What Drives CAP Rates in Southern Utah
-
Tenant Quality: National credit tenants or long WALT (weighted average lease term) command lower CAPs.
-
Location: Visibility, access, and proximity to growth corridors like River Road or Southern Parkway matter.
-
Building Age & Condition: Newer, energy-efficient assets tend to trade tighter.
-
Lease Structure: True NNN leases are preferred for passive investors.
Trends to Watch
-
Rising Interest Rates have widened spreads slightly, stabilizing values.
-
Functional Assets Outperform: Industrial and medical office show the most resilient pricing.
-
Private Capital Still Active: Cash buyers remain dominant in smaller transactions under $5M.
Investor Strategy
-
Compare apples to apples: Always adjust for lease term and TI exposure.
-
Look beyond CAP rate: Factor rent growth, appreciation, and risk profile.
-
Stress-test exits: Assume 25–50 bps expansion on sale to model conservatively.
CTA:
Want a second opinion on a property’s value or return profile? Contact me