What is a Cap Rate?
Capitalization rate (cap rate) is the ratio of net operating income (NOI) to property value, expressed as a percentage. A property generating $1 million in NOI with a $20 million value carries a 5 percent cap rate. Cap rates are the most commonly used metric for comparing income-producing real estate investments. Lower cap rates indicate higher valuations relative to current income (stronger market, lower yield); higher cap rates indicate lower valuations relative to current income (weaker market, higher yield).
Metro Vancouver Industrial Cap Rate Context
Metro Vancouver industrial cap rates have tightened materially over the past decade, supported by strong rent growth, structural supply constraints, and broad institutional capital demand. Current cap rates vary by submarket, asset quality, tenancy structure, and broader market conditions. Cap rate compression has slowed from peak rates but the asset class remains tightly priced relative to other Canadian industrial markets and to alternative asset classes.
Cap Rate Variation by Asset Class
Cap rates within industrial vary by asset class. Modern Class A institutional-grade product (large-format distribution, modern multi-tenant) trades at the tightest cap rates. Older Class B product with shorter-term leases or capex requirements trades at wider cap rates. Specialty assets (cold storage, manufacturing, owner-user) trade at varied cap rates depending on credit quality, lease structure, and buyer pool depth. Value-add opportunities trade at meaningfully wider cap rates reflecting execution risk.
Cap Rate Variation by Submarket
Submarket location affects cap rates within Metro Vancouver industrial. Vancouver-proper, Burnaby, and Richmond core submarkets typically trade at the tightest cap rates, supported by structural supply scarcity and strongest rent growth. Surrey and Delta trade at modestly wider cap rates reflecting both lower base rents and slightly different supply dynamics. Langley and Abbotsford trade at wider cap rates reflecting longer-distance submarkets and different growth profiles.
Cap Rate Variation by Tenancy
Tenancy structure meaningfully affects cap rates. Single-tenant credit lease properties (long-term lease to investment-grade tenant) trade at the tightest cap rates, reflecting cash flow certainty. Multi-tenant industrial trades at modestly wider cap rates reflecting tenancy diversification and rollover risk. Short-remaining-term leases trade at wider cap rates reflecting near-term re-leasing risk. Vacant or partially vacant assets require specific underwriting depending on lease-up assumptions.
Underwriting Industrial Cap Rates
Sophisticated investors don't just compare nominal cap rates — they underwrite the realized economics. Variables include in-place rent vs. market rent (mark-to-market opportunity over time), lease expiry profile, capex requirements (deferred maintenance, leasing capital, building improvements), operating cost reconciliation accuracy, and growth assumptions. A 4.5 percent cap rate on a property with 30 percent below-market rent and minimal capex needs is meaningfully different from a 4.5 percent cap rate on a property at market rent with significant capex needs.
Cap Rate Outlook
Cap rate outlook depends on interest rates, broader capital market conditions, and tenant demand fundamentals. Industrial cap rates have been highly responsive to interest rate environment over the past several years. Demand fundamentals (e-commerce growth, 3PL consolidation, supply chain reshoring, Asia-Pacific trade flows) remain structurally strong. The specific cap rate outlook is best assessed through direct market conversation reflecting actual transaction activity, which leads published data.