What a GTA industrial cap rate is really telling you.

What sets the number

The cost of money. Investors compare property yields with what they can earn risk-free. When the Government of Canada five-year bond yield rose sharply in 2022–2023, cap rates followed, with the usual lag: sellers held out, volumes fell, and prices adjusted over two years rather than two quarters.

The income's durability. A national tenant with ten years left on a net lease justifies a lower cap rate than a local tenant with eighteen months left. The difference between the two in the GTA is commonly 75 to 150 basis points.

The building and the land. Clear height, loading, site coverage, outside storage and zoning decide who could replace the tenant — and at what rent. A low-coverage site in a strong employment area carries land value a cap rate on today's income doesn't capture.

How GTA industrial cap rates have moved

At the 2021–2022 peak, well-leased GTA industrial traded at cap rates in the high 3% to low 4% range, often justified by rents that were well below market and expected to reset sharply higher.

As interest rates rose, cap rates widened by roughly 100 to 175 basis points over 2022–2024, depending on quality. Rent growth cushioned part of the price decline for owners who could re-lease; buildings with long below-market leases took the full effect.

Since then the market has found a range. Activity has returned, with private buyers and owner-users active below about $30M and institutional capital selective above it.

Using cap rates without being misled

Compare like with like: in-place cap rate on in-place income, or stabilised cap rate on stabilised income — never one against the other. A marketing package's "cap rate" is often calculated on income the building doesn't yet earn.

Off-market and owner-user sales distort the data. Owner-users buy for occupancy, not yield, and often pay prices that imply cap rates investors would never accept. Remove them before you average.

Twenty-five basis points is about five per cent of value at today's levels. On a building with $1M of NOI, the difference between 5.00% and 5.25% is about $950,000 — so the source and date of every cap rate you rely on matters.

Leverage: the test that matters now

When the mortgage constant (annual payment ÷ loan) is higher than the cap rate, every dollar borrowed reduces the cash return on equity — negative leverage. With commercial mortgage rates in the 5–6% range and a 25-year amortization, the mortgage constant sits around 7–8% — above most industrial cap rates — so many acquisitions today are financed at negative or neutral leverage. The return comes from rent growth and the exit, not from the debt.