A 1% difference in cap rate can move the indicated value of a commercial property by millions of dollars.
That is why “just use a five cap” is not commercial real estate analysis.
In this video, I break down one of the most misunderstood tools in Hawaii commercial real estate: the capitalization rate, or cap rate.
The basic formula looks simple:
Property Value = Stabilized NOI ÷ Capitalization Rate
But the formula is the easy part. The judgment behind the numbers is where serious commercial real estate analysis begins.
Using a hypothetical property producing $600,000 in stabilized net operating income, a 5% cap rate indicates approximately $12 million in value. At 6%, the same NOI indicates $10 million.
Same property income.
One percentage-point change.
A $2 million difference.
Before accepting any cap rate, investors and property owners should be asking deeper questions:
Is the NOI based on actual trailing income or a pro forma? Are rents contractual or assumed market rents? Are operating expenses complete? What about tenant strength, lease duration, physical condition, deferred maintenance, future capital requirements, location, liquidity and investor expectations?
Those questions become especially important when analyzing income-producing commercial property in Hawaiʻi, where comparable investment sales may be limited and every asset can have its own operating story.
A cap rate is useful. It simply isn’t a magic property-value button.
If you own commercial real estate in Hawaiʻi, are considering an acquisition, or are evaluating a sale from the U.S. mainland or overseas, I help clients examine the asset, market and positioning behind the headline number.
Jason Wong (PB), MBA
President & Principal Broker
Island Dragonfly, LLC
Hawaiʻi Real Estate Broker RB-22819
Personal site: JasonWong.us
Island Dragonfly: IslandDragonfly.com
Disclaimer: Educational real-estate commentary only. This content is not an appraisal, legal, tax, accounting, financial, or investment advice. A formal appraisal, where required or desired, should be performed by an appropriately licensed or certified appraiser.
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