Cap Rate Explained
Cap rate is the shorthand commercial investors use to compare properties across very different types and sizes. The math is simple: net operating income divided by property value. A Macomb County retail strip with $130,000 of NOI selling for $1.6 million has roughly an 8 percent cap rate. That 8 percent represents the unleveraged return a cash buyer would earn in year one before any financing, tax benefits, or appreciation enter the picture.
Why cap rate matters is the comparison it enables. An office condo in downtown Rochester, a warehouse along Van Dyke, and a retail strip near Hall Road look nothing alike, but their cap rates put them side by side on the same scale. Lower cap rates mean the market sees less risk or stronger growth expectations, so buyers pay more per dollar of income. Higher cap rates mean the opposite.
Across Macomb County, cap rates cluster by product type and submarket. Newer single tenant net lease properties with credit tenants on major corridors trade in the 6 to 7 percent range. Multi tenant retail in established neighborhoods runs 7 to 8 percent. Older multi tenant industrial along the Van Dyke corridor or in Warren typically sits at 8 to 9 percent. Value add properties with vacancy or deferred maintenance can push past 10 percent. Knowing where a deal fits on that scale tells a buyer quickly whether the asking price is in the ballpark.
Cap rates reflect both risk and growth expectations the market embeds in a property’s price. A 6.5 percent cap rate on a newer single tenant retail property on M-59 with a national credit tenant signals strong income durability. A 10 percent cap rate on an aging multi tenant industrial in Warren signals concentrated risk in tenant turnover and capital needs. Neither cap rate is right or wrong. They are pricing different futures.
Cap rates also move with interest rates and capital markets. When the 10 year Treasury climbs, cap rates usually follow because buyers need higher yields to justify the risk premium over risk free returns. Macomb County cap rates have widened by 50 to 150 basis points across most property types since 2022, which has softened prices from peak levels. Buyers with capital ready to deploy in the current environment are finding deals that did not pencil at lower rates.
The most important thing to understand about cap rates is that they reflect the income at the time of measurement. Going in cap rate uses current actual NOI. Pro forma or stabilized cap rate uses projected NOI after lease up or improvements. A listing advertising a 10 percent stabilized cap might actually have a 5.5 percent going in cap, meaning the buyer has to earn the jump through real work. Buyers who do not understand that distinction overpay regularly.
Michigan’s property tax uncapping at sale affects cap rate analysis. The seller’s tax bill is usually lower than what the buyer will pay after taxable value uncaps to current state equalized value, which shrinks real NOI and therefore real cap rate below the advertised number. Any serious cap rate analysis on Macomb County commercial property should rebuild NOI with post sale tax estimates before applying market cap rates.
Cap rate is one tool, not the whole story. Two 8 percent cap deals can behave very differently. One might have short term leases rolling soon and a roof past its useful life, making the real return far lower than 8 percent after capital work. The other might have long term leases with escalations and new systems, making the 8 percent durable. Cap rate is only as good as the income behind it.
TDG Commercial, recognized as top commercial realtors in Macomb County, uses current cap rate data to evaluate deals and price listings across the region. The number used correctly protects against overpaying. Used lazily, it produces mispriced deals on both sides.
