A cap rate (capitalization rate) is a property's net operating income divided by its price. It tells you the unlevered annual return a commercial property produces before financing. On the commercial acquisitions our team has completed for clients across BC and Alberta, cap rates have ranged from 5.8% to 7.0%. This guide explains how to calculate a cap rate, what moves it, and how to use it when you look at commercial property in Surrey and the Fraser Valley.
How to calculate a cap rate
The formula is simple:
Cap rate = net operating income (NOI) divided by purchase price
Net operating income is the rent and other income the property collects in a year, minus the costs of operating it: property tax, insurance, repairs, management, utilities the landlord pays and an allowance for vacancy. It does not subtract mortgage payments or income tax. That is the point of the number: it compares properties on their own merits, regardless of how a particular buyer finances them.
Illustrative example: a small retail building collects $310,000 a year in rent and recoveries. After $70,000 of operating costs, NOI is $240,000. If the price is $4,000,000, the cap rate is $240,000 divided by $4,000,000, or 6.0%. If a buyer paid $3,700,000 instead, the same income would be a cap rate of about 6.5%. A lower price means a higher cap rate, which is why negotiation matters so much in commercial deals.
Cap rates on deals our team has closed
These are acquisitions our team completed for clients, as published on our client success stories page. The cap rate is the figure at the price our client paid.
| Property | Location | Type | Purchase price | Cap rate |
|---|---|---|---|---|
| 276 Victoria St | Kamloops, BC | Office building | $6.2M | 7.0% |
| 250 Winnipeg St (Iron City Square) | Penticton, BC | Commercial centre | $8.5M | 6.8% |
| 99 Padmore St | Penticton, BC | Office building | $2.9M | 6.6% |
| 3210 25 Ave | Vernon, BC | Medical building | $10.5M | 6.6% |
| 5411 132 Avenue | Edmonton, AB | Retail plaza | $4.65M | 6% |
| 6010 Brickyard Road | Nanaimo, BC | Commercial property | $4.05M | 6% |
| 40 Copperpond Passage SE | Calgary, AB | Commercial property | $3.575M | 6% |
| 4509 25 Avenue | Vernon, BC | Commercial property | $3.195M | 6% |
| 2230 Cliff Ave | Courtenay, BC | Retail centre | $4.5M | 5.8% |
Two patterns stand out. First, the office and medical buildings sat at the higher end of the range. Second, the retail centre anchored by national food brands sat at the lower end, because buyers will accept a lower return for tenants they see as very secure. Several of these deals also closed below the list price after negotiation, which pushed the cap rate up for our clients.
These results are specific to those buildings, tenants and dates. They are not a forecast or a market-wide figure for Surrey or anywhere else. The only reliable cap rate is the one you calculate from a property's actual income and expenses.
What makes a cap rate higher or lower
- Tenant strength. A national tenant on a long lease is lower risk than a new local business, so buyers accept a lower cap rate for it.
- Lease length and terms. Years remaining on leases, renewal options and whether tenants pay their share of taxes and operating costs (net leases) all change how dependable the income is.
- Location. Properties in larger urban centres with strong demand for space usually trade at lower cap rates than similar buildings in smaller markets. That is one reason many investors look beyond Metro Vancouver to find higher returns, as several of our clients did.
- Building age and condition. A roof, parking lot or mechanical system near the end of its life is a cost the buyer will carry. Buyers price that in.
- Property type. Industrial, retail, office, medical and mixed-use buildings each carry different risks and attract different buyers.
- Interest rates. When borrowing costs rise, buyers usually need a higher return to make the numbers work, and prices adjust.
Reading cap rates in Surrey and the Fraser Valley
Surrey, Langley and Abbotsford have a mix of retail plazas, light industrial buildings, office and medical space, and mixed-use buildings with suites above stores. When you compare properties here, make sure you compare like with like: a fully leased industrial warehouse in Surrey and a retail strip with two vacant units will never trade on the same terms.
Ask the seller for a rent roll, copies of the leases, the last two years of operating statements and the property tax notice. Rebuild the NOI yourself: sellers sometimes leave out a vacancy allowance, management costs or repairs. A listing that advertises a high cap rate on a building with short leases and deferred maintenance may be a lower real return than a building with a lower advertised rate and secure tenants.
Our pages on commercial real estate in Surrey, commercial property in Langley and commercial property in Abbotsford cover what is available in each market and how we help buyers there.
Cap rate is a starting point, not the whole answer
The cap rate ignores financing, which is a large part of your actual return. Two buyers of the same building at the same cap rate can end up with very different results depending on their down payment, interest rate and amortization. Business owners who buy the building they operate from may qualify for owner-occupied financing of up to 100% for qualified buyers through the commercial bankers we work with, and that changes the picture again.
The cap rate also ignores future changes. Rent increases built into leases, the cost of filling vacant space, and the price you might sell for later all matter. Use the cap rate to screen and compare, then look at the full picture before you commit.
How our team helps commercial buyers
As one of the Top 3 commercial teams across Canada at RE/MAX, based on commission in 2025, we spend most of our time on exactly this analysis: finding properties, rebuilding the numbers, and negotiating the price that gets our clients the return they need. If you are looking at commercial plazas or any income-producing property in BC, talk to us before you make an offer.
Frequently asked questions
What is a cap rate in commercial real estate?
A cap rate is a property's net operating income divided by its price. It shows the annual return the property produces before financing and income tax, so you can compare buildings on their own merits.
How do I calculate a cap rate?
Take the yearly income, subtract operating costs such as property tax, insurance, repairs, management and a vacancy allowance, and divide the result by the price. $240,000 of net operating income on a $4,000,000 price is a 6.0% cap rate.
Is a higher cap rate better?
A higher cap rate means more income for the price, but it often comes with more risk, such as shorter leases, weaker tenants or an older building. A lower cap rate on secure, long-term income can be the better investment.
What cap rates has your team achieved?
On the commercial acquisitions published on our success stories page, cap rates ranged from 5.8% on a retail centre in Courtenay to 7.0% on an office building in Kamloops. Those figures apply to those properties only.
Does the cap rate include my mortgage?
No. Net operating income is calculated before mortgage payments. Your financing changes your cash return, which is why two buyers of the same building can see very different results.
Sources
The deal figures in this article come from our published client results.