What Is the Current Cap Rate in Las Vegas?
Investing in commercial real estate can be tricky. Trying to sort the good and bad deals is hard enough without the excessive jargon surrounding commercial real estate investment. As a commercial real estate investor, one piece of jargon you should familiarize yourself with is “capitalization rate,” often called “cap rate.”
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Why Is Cap Rate Important?
The cap rate of a property is consequential because it indicates whether owning it is financially wise. A cap rate is the annual net operating income (NOI) of a property divided by its current market value. A high capitalization rate indicates a high return potential.
While a high cap rate points towards high profitability, it should not be the only measure for your investment decisions. In most cases cap rates only assess the profitability of real estate for one year. Because cap rates analyze a short period, looking exclusively at a building’s cap rate can paint a heavily skewed picture of its return potential.
What Is the Average Cap Rate in Las Vegas?
For the year to date, the average cap rate in the Las Vegas Valley ranges between 5.67% and 7.15%. A building’s market value largely determines its capitalization rate. If two buildings have the same NOI but one building is worth twice as much as the other, the lesser valued property’s cap rate would be twice that of the more expensive one. Given equal cap rates, a building worth twice as much as another will have double the NOI.
You should compare the cap rates of commercial properties with similar qualities since it can heavily impact property values. For obvious reasons, it doesn’t make sense to compare the cap rate of an older 10-unit retail plaza with that of a brand new 50-floor office building.
The other factor that is critical in determining the true value is the overall condition of the property. Some property owners defer maintenance and repairs to raise the NOI just prior to listing a property. A full property inspection and analysis helps protect purchasers from large deferred costs. It also helps to align the property value by crediting for deferred items.
The quality of the existing leases and tenants is another critical component that is researched in-depth during the purchaser’s feasibility period. A fully-occupied building at above-market rents with low quality tenants or short term leases will be overvalued. true income and needs to be adjusted to factor in true market rents and possible loss of revenue for tenant turnover.
Related: What Should I Look for in a Commercial Property?
What Is the Current Cap Rate in Las Vegas Per Property Type?
Breaking down Las Vegas commercial real estate into three property categories will give you a more comprehensive view of current cap rates than one single average.
Cap Rate for Class A Properties in Las Vegas for 2019
In Class A properties, prices range from $10,100,000 to $19,900,00. They are generally new buildings in excellent areas and have the highest market values. The average price of Class A property in Las Vegas year-to-date is $14,300,000, and the median price is $12,900,000.
Class A properties offer an average of 60,077 sq. ft. of space, while their median area is 74,140 square feet. The average price per square foot for a Class A property is $207.02, while the median price is $174. Both the average and median cap rate for Class A properties in Las Vegas is 5.67%.
Cap Rate for Class B Properties in Las Vegas for 2019
Class B properties are second-tier commercial buildings. They are generally older buildings in working condition that occupy decent areas and have mid-tier market values. As a category, Class B properties range in price from $141,960 to $27,287,484. The average price of Class B property in Las Vegas is $1,931,379, and the median price is $930,000.
In Las Vegas, the average Class B property offers 9,348 sq. ft. of space, while the median area is 5,482 sq. ft. The average price per square foot is $190.41, while the median price is $158.44. The average cap rate year-to-date for Class B properties in Las Vegas is 7.15%, and the median is 7.08%.
Cap Rate for Class C Properties in Las Vegas for 2019
Class C properties are some of the oldest buildings on the market. They have the lowest market values and often require renovations to become marketable. This year the Class C properties range in price from $225,000 to $1,800,000. In Las Vegas, the year-to-date average price for a Class C property is $700,425, and the median price is $575,000.
Class C properties offer an average of 4,151 sq. ft. and a median of 2,954 sq. ft. of space. The average price per square foot is $157.70 and the median price is $167.53. Both the average and median cap rate for Class C properties in Las Vegas is 6.5%. This is an unusual condition as we normally seem Class C properties range 1% to 2% higher in CAP rates compared to Class B.
While cap rates are not the only metric that commercial real estate investors should watch, they do provide valuable insight into a building’s return potential. If you are interested in buying or selling commercial real estate in Las Vegas, you should work with an experienced commercial real estate broker that knows how to effectively assess cap rates and other performance metrics to help you achieve your goals.