What is a cap rate in industrial real estate investment?

What is a cap rate in industrial real estate investment?

The capitalization rate is the foundational valuation tool in commercial real estate investment. It expresses the relationship between a property's net operating income — the annual rental income after operating expenses but before debt service and capital costs — and its market value or transaction price. The formula is simple: Cap Rate = Net Operating Income / Purchase Price. Rearranged: Purchase Price = Net Operating Income / Cap Rate. In practical terms, if an industrial property generates $500,000 per year in net operating income and the applicable market cap rate is 5.0%, the implied value of the property is $10,000,000 ($500,000 / 0.05). If cap rates compress to 4.5% with the same NOI, the implied value rises to $11,111,111. This inverse relationship between cap rates and values is why cap rate compression — driven by investor demand for industrial real estate — was the primary engine of GTA industrial property value appreciation between 2015 and 2022. In the GTA industrial market in 2026, cap rates vary significantly by asset quality, location, lease term, and tenant covenant. Core infill single-tenant industrial buildings in Mississauga, Vaughan, and Brampton with long-term net leases to creditworthy tenants are pricing at approximately 4.25% to 5.25%. Secondary market or shorter-lease industrial assets in outer-ring submarkets trade at 5.25% to 6.50%. Value-add or vacant industrial properties trade on a price-per-SF basis rather than a cap rate basis since there is no stabilized income to capitalize. The factors that drive cap rate compression (higher values) in the GTA industrial market include strong tenant credit, long remaining lease term, annual rent escalations above inflation, low vacancy risk, and location in a supply-constrained submarket. Factors that drive cap rate expansion (lower values) include short remaining lease term, below-market rent that will reset at renewal, below-investment-grade tenant credit, single-tenant concentration risk, and functional obsolescence (low clear height, poor dock ratio). For owner-occupiers and tenants considering whether to buy or lease their industrial facility, the cap rate provides a benchmark for comparing the cost of ownership (the implied yield required by an investor) to the cost of leasing (the current market rent). If industrial properties are trading at 5% cap rates and current market rents represent a 7% return on the purchase price, leasing is typically more economical than owning. Michael Law advises GTA industrial investors and owner-occupiers on acquisition valuation, cap rate analysis, and investment strategy across the 905 corridor. Contact Michael at mlaw@lennard.com or (905) 917-2045.