The capitalization rate is the single most quoted — and most misunderstood — number in commercial real estate. It's not a verdict on a deal; it's a starting point for a conversation about risk, growth, and basis.
What a cap rate really tells you
A cap rate is simply net operating income divided by price. A lower cap rate means a higher price relative to current income — which the market will pay when it expects rents to grow or sees the asset as low-risk. A higher cap rate signals more risk, less growth, or a softer submarket.
Reading the spread
- Compression (falling cap rates) signals competition and confidence in rent growth.
- Expansion (rising cap rates) follows higher interest rates or softening demand.
- The gap between asset classes — industrial vs. older retail, say — tells you where the market is pricing risk.
Don't buy a cap rate. Buy the durability of the income behind it.
Underwriting discipline
The number that matters is the one you underwrite — trailing income, real expenses, and a defensible exit. In a market like South Florida, where growth assumptions can run hot, conservative underwriting is what separates a good basis from a regret.
Igor Presman
Commercial Broker · Trybal Group
