“What’s my building worth?” With commercial real estate, the answer isn’t about what the place down the street sold for. It’s about the income the property produces. Understanding cap rate and NOI is the single most useful thing an owner can do before selling. Here’s how it works.
Net operating income (NOI): the starting point
NOI is the property’s annual income after operating expenses, but before mortgage payments, income tax, and capital expenditures. In short: gross rental income, minus vacancy, minus operating costs like property taxes, insurance, utilities, management, and maintenance. NOI is what a buyer is really purchasing, so a clean, accurate income statement is worth real money at sale.
The cap rate: turning income into value
The capitalization rate is the return a buyer expects for the asset type and market. The core formula ties it all together:
| Formula | Example |
|---|---|
| Value = NOI ÷ Cap Rate | $180,000 ÷ 6% = $3,000,000 |
| Cap Rate = NOI ÷ Price | $180,000 ÷ $3,000,000 = 6% |
| NOI = Value × Cap Rate | $3,000,000 × 6% = $180,000 |
Lower cap rates mean higher prices (and vice-versa). A stabilized apartment building in a strong market might trade at a low cap rate; a vacant retail plaza in a small town at a much higher one. A one-point move in the cap rate can swing value by hundreds of thousands of dollars.
What actually drives your value
- Income and expenses: higher, reliable NOI lifts value directly
- Lease quality: strong tenants and long remaining terms lower risk and the cap rate
- Vacancy: empty space cuts NOI and raises perceived risk
- Condition: deferred maintenance and looming capital costs get priced in
- Asset type and market: multifamily, industrial, retail, and office all trade at different cap rates
How this shapes a cash offer
A cash buyer runs exactly this math, then adjusts for the work the building needs and the risk it carries. That’s why cleaning up your rent roll, documenting expenses, and reducing vacancy before you sell can meaningfully raise your number, whether you list or sell direct.
The bottom line
Commercial value is income divided by a market cap rate. Know your NOI, understand the cap rate for your asset and market, and you’ll understand your building’s worth, and where you can add to it before you sell.
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Frequently Asked Questions
How is commercial property valued in Canada?
Primarily by income. You divide the net operating income (NOI) by a market capitalization rate for the asset type and location to estimate value.
What is a cap rate?
The capitalization rate is the return a buyer expects, expressed as NOI divided by price. Lower cap rates mean higher values; higher cap rates mean lower values.
What is NOI?
Net operating income is annual income after operating expenses but before mortgage payments, income tax, and capital expenditures. It’s what buyers are really purchasing.
How can I increase my building’s value before selling?
Raise and document NOI: reduce vacancy, tighten expenses, strengthen leases, and clean up the income statement. Addressing obvious deferred maintenance also helps.
Why do cap rates differ by property type?
Each asset class carries different risk and demand. Multifamily and industrial often trade at lower cap rates (higher prices), while some retail and office trade higher.
Does a cash buyer use cap rate too?
Yes. A cash buyer applies a market cap rate to your NOI, then adjusts for condition, vacancy, and risk to reach the offer.