By Kas Filippova, eXp Commercial
📍 Serving Greater Cleveland and Northeast Ohio
If you’ve spent any time evaluating commercial properties, you’ve probably come across the term cap rate. It’s one of the most common — and misunderstood — metrics in real estate investing. Whether you’re buying your first retail building or reviewing a mixed-use redevelopment, understanding how cap rates work is key to making smart, profitable decisions.
1️⃣ What Is a Cap Rate?
The capitalization rate, or cap rate, measures a property’s expected annual return based solely on its income, ignoring financing.
Formula:
👉 Cap Rate = Net Operating Income (NO I) ÷ Purchase Price
Example:
If a property generates $120,000 NOI and is priced at $2 million,
Cap Rate = $120,000 ÷ $2,000,000 = 6%
A 6% cap rate means the investor would earn a 6% annual return on the purchase price if the property were bought in cash.
2️⃣ How Investors Use Cap Rates
Cap rates help investors quickly compare returns across different properties or markets.
- Higher cap rates = higher return potential but often more risk (shorter leases, lower credit tenants, or older buildings).
- Lower cap rates = lower return but more stability (credit tenants, long leases, prime locations).
In other words, cap rate = risk + return.
3️⃣ What’s a “Good” Cap Rate in Northeast Ohio?
It depends on the asset type and location. Submarkets such as Lakewood, Avon, Westlake, and Ohio City typically trade at lower cap rates due to strong demand, while emerging areas like Elyria, Painesville, and Euclid offer higher returns with more value-add potential.
4️⃣ Cap Rates Reflect Market Conditions
Cap rates move with interest rates, investor demand, and perceived risk.
- When interest rates rise, investors expect higher returns → cap rates expand.
- When rates fall or demand surges → cap rates compress.
Local factors — vacancy trends, tenant demand, and new construction — also influence cap rates. For instance, high traffic corridors like Detroit Ave or Mayfield Rd often command tighter caps due to consistent tenant interest and limited supply.
5️⃣ Beyond the Cap Rate: The Bigger Picture
Cap rate alone doesn’t tell the whole story. A good investor also reviews:
- Lease term and tenant credit — A 6% cap with a 10-year lease is stronger than 7% with a 1-year term.
- Future rent growth — Below-market rents may signal upside.
- Capital expenses — Roof, HVAC, or façade repairs can impact returns.
- Location trajectory — Are new developments or city investments improving the area?
Cap rates should always be analyzed alongside NOI stability, asset condition, and market momentum.
6️⃣ Applying Cap Rate Analysis to Your Investment Strategy
- Stabilized assets: Focus on lower caps with predictable income.
- Value-add projects: Target higher caps with renovation or re-tenanting potential.
- Long-term hold: Balance current yield with appreciation potential in growing submarkets.
In Northeast Ohio, the sweet spot often lies in under-managed assets in established suburbs — properties with solid fundamentals and room to improve NOI through better leasing or light renovations.
Final Thoughts
Understanding cap rates helps investors evaluate opportunity, manage risk, and negotiate with confidence. While the metric is simple, its implications are powerful — guiding everything from pricing to financing decisions.
If you’re evaluating an investment or need help underwriting a property, I’d be happy to provide a local market analysis and cap rate comparison tailored to your goals.
Kas Filippova | eXp Commercial
📞 216-374-3689
🌐 kascommercial.com
📍 Cleveland, Ohio