The Capitalization Rate (Cap Rate) is the most fundamental metric in commercial real estate. It measures the unleveraged return on an asset. In plain English: if you bought the building in cash, what percentage return would you make in the first year?
Cap Rate assumes you paid all cash. Cash-on-Cash Return (ROI) accounts for your mortgage/leverage. An investor might buy a 5% Cap Rate building, but by using a mortgage, they might achieve a 10% Cash-on-Cash return. Cap Rate helps you compare the building's performance; ROI helps you compare your performance.
Cap rates vary by location and risk. A Class-A apartment building in downtown Manhattan might trade at a 4% Cap Rate (low risk, low return), while a strip mall in a rural town might trade at an 8% Cap Rate (higher risk, higher return). As interest rates rise, Cap Rates generally rise as well, lowering property values.