Commercial Property

Commercial property is real estate held to produce income: apartment buildings, offices, retail, industrial and hospitality. It is the asset class where cap rates are quoted as a matter of course, because commercial buyers, brokers, appraisers and lenders all price property by capitalizing its net operating income.

Commercial cap rates vary by sector and quality. Apartments in strong metros have traded at 4 to 6%, offices and retail higher, and secondary markets and older assets higher still. Brokers quote a cap rate on every listing and publish market surveys of cap rates by property type and city.

On the residential side, one to four unit rentals are bought and sold mostly by comparable sales, and their cap rates are inferred afterward. That is why residential cap rates are less standardized and why a listing's cap rate needs rebuilding from the expenses. The five-unit line, where residential financing ends and commercial begins, is also roughly where cap rate becomes the primary pricing tool.

Further reading: Commercial Property on Wikipedia.