The average terminal capitalization rate for commercial real estate varies depending on the market and property type. According to Crefcoa, the average terminal capitalization rate for multifamily properties is between 6.5% and 8.5%.

The terminal capitalization rate for commercial real estate is influenced by a variety of factors, including the property's attributes and location, comparable transaction data, and the expected net operating income (NOI) of the exit year. Additionally, the going-in cap rate, which is the projected first-year NOI divided by the initial investment or purchase price, can also influence the terminal cap rate. Generally, a lower terminal capitalization rate as compared to the going-in cap rate typically translates to capital gains (assuming NOI doesn’t decrease).

For more information, please see Terminal Capitalization Rate.

The terminal capitalization rate is an important metric for commercial real estate investors, as it can be used to estimate the profitability of the sale of an investment property. Generally, a lower terminal capitalization rate as compared to the going-in cap rate typically translates to capital gains (assuming NOI doesn’t decrease). Therefore, many commercial real estate investors favor markets and property types where cap rates are expected to fall.

However, terminal cap rates aren’t entirely accurate metrics and usually require an in-depth analysis of various data and metrics across comparable transactions, properties, and markets.

The terminal capitalization rate is a calculation of the projected net operating income of the exit year divided by the sale price. This is in stark contrast to the going-in cap rate, which demonstrates the projected first-year NOI divided by the initial investment or purchase price.

The terminal capitalization rate, sometimes known as the terminal cap rate or exit rate, describes the rate utilized to estimate a property’s resale value at the end of the holding period. In order to find the terminal value of an investment, the expected net operating income (NOI) per year must be divided by the terminal cap rate. The terminal capitalization rate is typically expressed as a percentage.

The terminal capitalization rate is estimated using comparable transaction data or by assigning fair value based on the property’s attributes and location. Using these estimations, in practice, the terminal capitalization rate is found by dividing projected NOI of the final year of the holding period by the expected sale price of the property.

Investors can use the terminal capitalization rate to evaluate a commercial real estate investment by comparing the terminal cap rate to the going-in cap rate. If the terminal cap rate is lower than the going-in cap rate, it typically indicates that the investment is profitable. However, it is important to note that terminal cap rates are not always accurate and require an in-depth analysis of various data and metrics across comparable transactions, properties, and markets.