What Is a Good Cap Rate? (By Asset Class and Market Type)
There’s no single number that makes a cap rate “good.” A 4.5% cap rate can be a great buy on an infill industrial building and a terrible buy on a tertiary-market strip center. An 8% cap rate can be a steal on a well-located value-add multifamily deal and a warning sign on a downtown office tower with three years left on its anchor lease.
Cap rate is a pricing signal, not a grade. It tells you how the market is pricing risk and growth expectations for a specific property right now. To know whether a cap rate is good, you have to know what’s driving it: asset class, market tier, tenant quality, lease structure, and where interest rates sit in the cycle. This page walks through typical ranges by property type and market, then gives you the framework to judge any specific deal on its own terms.
What a cap rate actually measures
Cap rate (capitalization rate) is net operating income divided by purchase price or current market value:
Cap Rate = NOI / Value
It’s a snapshot yield, unleveraged, before debt service. It ignores financing, income tax, and future NOI growth. That’s useful for comparing deals on an apples-to-apples basis (strip out each buyer’s capital stack and you’re left with the raw yield the real estate produces), but it also means cap rate by itself tells you nothing about your actual return if you’re using debt, and nothing about what happens to income five years out.
The relationship between price and cap rate is inverse. Higher price for the same NOI means a lower cap rate. Lower price for the same NOI means a higher cap rate. So when people say cap rates “compressed,” they mean prices went up relative to income. When cap rates “expanded” or “moved out,” prices came down relative to income.
A cap rate is a risk signal, not a scorecard
The reason cap rates differ across asset classes and markets comes down to one idea: investors accept a lower going-in yield for lower perceived risk and better growth prospects, and demand a higher yield to compensate for more risk or slower expected growth.
A simplified version of this shows up in the Gordon growth model, where cap rate roughly equals an investor’s required return minus their expected NOI growth rate. A property in a market with strong rent growth can trade at a lower cap rate and still deliver an acceptable return, because the investor is underwriting appreciation, not just the day-one yield. A property with flat or declining income prospects has to offer a higher going-in yield to attract capital, because growth isn’t going to do the work.
Practically, the things that push a cap rate down (lower risk, “better” in the eyes of the market) include:
- A deep, liquid buyer pool for that asset type (more competition for the deal)
- Strong, diversified tenant credit and long remaining lease term
- Located in a market with durable demand drivers and limited new supply
- Low management intensity (a net-leased single tenant vs. a full-service hotel)
- Access to cheap, plentiful debt (agency financing for multifamily is the clearest example)
And the things that push it up (higher risk, priced accordingly):
- Thin buyer pool or illiquid asset type
- Short lease term, weak tenant credit, or near-term rollover exposure
- Functional obsolescence or deferred capital needs
- Operationally intensive assets where NOI is more volatile (hotels, some senior housing)
- Secondary or tertiary market with thinner transaction volume
A “high” cap rate isn’t automatically a bargain. Sometimes it’s the market correctly pricing in real problems: rollover risk, deferred maintenance, a shrinking tenant base, or a market with negative population growth. A “low” cap rate isn’t automatically overpriced. Sometimes it’s the market correctly pricing in scarcity and durable demand. Your job as a buyer is figuring out which story is actually true for the specific asset in front of you.
Cap rate ranges by asset class
The ranges below are general, practitioner-level guideposts for stabilized, institutional-quality assets, not live market data. Actual cap rates for any given deal move with interest rates, local supply and demand, and the specific asset’s condition and tenancy. Always confirm current pricing with recent comps, a broker’s opinion of value, or a paid data service before you underwrite a real deal off any number on this page.
| Asset Class | Typical Stabilized Range | What Drives It |
|---|---|---|
| Multifamily (market-rate, stabilized) | Roughly mid-4% to mid-6%, tighter in supply-constrained coastal metros, wider in secondary/tertiary or value-add deals | Broadest buyer pool of any commercial asset class, agency debt (Fannie/Freddie) keeps financing cheap and plentiful, demand tied to household formation rather than any single employer or industry |
| Industrial: big-box logistics/distribution | Roughly mid-4% to low-6% | Structural tailwind from e-commerce and supply-chain reconfiguration, low functional obsolescence, simple building systems |
| Industrial: infill/last-mile, prime metros | Roughly 4% to mid-5% | Land scarcity and irreplaceable locations near dense population centers |
| Industrial: older flex or light manufacturing | Roughly 6% to mid-7% | Functional obsolescence, smaller buyer pool, more capex risk |
| Retail: grocery-anchored neighborhood centers | Roughly 6% to mid-7% | Necessity-based tenancy, resilient foot traffic, harder for e-commerce to fully substitute |
| Retail: power centers/unanchored strip | Roughly 7% to mid-8% | More tenant concentration risk, more exposure to big-box closures and e-commerce substitution |
| Retail: single-tenant net lease (credit tenant, long term remaining) | Roughly 5% to 7% | Bond-like income stream; tenant credit and lease term drive pricing more than the real estate itself |
| Office: Class A, stabilized | Roughly mid-6% to 9%+ | Widest dispersion of any asset class since 2020; tenant credit, remaining lease term, and building amenities matter enormously |
| Office: Class B/C or near-term rollover | Often 9% to double digits | Elevated vacancy risk, leasing costs (TI/LC) to re-tenant, uncertain re-leasing demand |
| Hospitality: full-service | Roughly 7% to 9% | Operating business risk layered on top of real estate risk, revenue reprices daily (RevPAR), management-intensive |
| Hospitality: limited/select-service | Roughly 8% to 10%+ | Same operating volatility as full-service, plus lower barriers to competitive new supply |
| Self-storage (stabilized, institutional-grade) | Roughly 5% to mid-6% | Low operating costs relative to revenue, but month-to-month leases mean income reprices fast in both directions |
| Medical office | Roughly 6% to mid-7% | Defensive, inelastic healthcare demand, offset by specialized buildouts that narrow the pool of alternative uses |
Cap rate ranges by market type
The same asset class prices differently depending on where it sits. Three broad tiers show up in how brokers and investors talk about markets:
| Market Tier | General Pricing Pattern | Why |
|---|---|---|
| Primary/gateway (e.g., New York, San Francisco, Los Angeles, Boston, DC, Chicago core) | Compressed cap rates relative to the same asset class elsewhere | Deepest institutional buyer pool, highest liquidity, perceived as the safest place to park large amounts of capital |
| Secondary (e.g., Austin, Charlotte, Nashville, Denver, Tampa) | Sits between primary and tertiary, often with the strongest rent-growth story | Real population and job growth, but a shallower buyer pool than the true gateway markets |
| Tertiary/smaller metros | Widest cap rates for comparable asset quality | Thin transaction volume, fewer institutional buyers competing for the deal, harder and slower exit when you sell |
This is why the exact same building, same NOI, same tenant, can trade at meaningfully different prices depending on which metro it’s in. You’re not just buying the income stream, you’re buying the depth and liquidity of the pool of future buyers you’ll eventually sell to.
Why cap rates move: rates, spreads, and negative leverage
Cap rates don’t sit still. The two biggest forces that move them are the cost of capital and the flow of capital into or out of an asset class.
When interest rates rise, the cost of debt rises with them, and buyers generally need a wider spread between the cap rate and their cost of debt to make a deal pencil. That pushes cap rates up (prices down) across most asset classes, though not by the same amount everywhere; asset classes with the deepest buyer pools and best growth stories tend to hold their pricing better than commodity assets in secondary locations.
Investors also watch the “cap rate spread,” meaning how much cushion exists between prevailing cap rates and a benchmark like the 10-year Treasury yield. A wide spread suggests real estate is priced to compensate investors well for the extra risk over a risk-free bond. A thin or negative spread suggests real estate is priced for growth, for scarcity, or possibly for more risk than the market is charging for.
One number worth understanding directly: negative leverage. If your going-in cap rate is lower than your cost of debt, every dollar you borrow drags your levered return below your unlevered return, unless you’re underwriting meaningful NOI growth or a future cap rate compression on exit to make up the difference. Buyers accept negative leverage all the time in low-cap-rate asset classes like top-tier multifamily, but they’re making a specific, explicit bet on growth when they do. If you don’t see that growth story clearly, negative leverage is a red flag, not background noise.
Cap rate isn’t your return
This trips up a lot of people evaluating their first few deals. Cap rate is not your cash-on-cash return, and it’s not your IRR.
- Cap rate is unleveraged, day-one, before financing and before any assumption about future growth.
- Cash-on-cash return is your actual cash flow after debt service, divided by the equity you put in. Leverage can push this well above or below the cap rate depending on your loan terms.
- IRR accounts for the full holding period: income, growth, refinancing, and the eventual sale, all time-weighted.
A deal can have a mediocre going-in cap rate and still be an excellent investment if you’re underwriting real NOI growth, a value-add repositioning, or debt paydown that builds equity over the hold. A deal can have an attractive cap rate and still be a bad investment if the income is about to fall off a cliff. Cap rate is your starting point for underwriting, not your answer.
How to judge whether a specific cap rate is good
Run through this before you decide a cap rate is attractive or expensive:
- Compare it to recent, comparable sales in the same submarket and asset class, not to a national average pulled from a headline.
- Check what the NOI is actually built on. In-place income from a diversified, creditworthy rent roll is worth more than pro forma income based on optimistic lease-up assumptions.
- Look at remaining lease term and rollover schedule. A cap rate on income that disappears in 18 months isn’t the same as a cap rate on income locked for a decade.
- Compare it to your cost of debt. If it’s below your interest rate, you’re in negative leverage; know exactly what growth assumption you need to make that work.
- Weigh the market tier. A cap rate that looks high relative to a gateway-market benchmark might just be the going rate for that metro, not evidence of an undervalued deal.
- Factor in capital needs. A cap rate on a building that needs a new roof, new HVAC, and a lobby renovation isn’t the real yield you’ll earn until you net out that capex.
- Ask why the seller is selling at this price. Cap rate can reflect a genuinely mispriced asset, or it can reflect information the seller has that you don’t yet.
Common mistakes when reading a cap rate
- Treating cap rate as a universal quality score. A 5% cap rate isn’t “better” than a 7% cap rate in the abstract; they’re pricing different risk profiles.
- Comparing across asset classes without adjusting for risk. A 6% office cap rate and a 6% multifamily cap rate are not equivalent bets.
- Using a stale or national-average cap rate to underwrite a specific local deal. Cap rates are local and asset-specific; a national average smooths over exactly the variation that matters.
- Ignoring the NOI quality behind the number. Two properties can share an identical cap rate off two very different levels of income durability.
- Forgetting that cap rate excludes debt. Your actual investment performance depends heavily on how you finance the deal, not just the going-in yield.
Cap rate is the fastest way to compare deals at a glance, and it’s also the number most likely to be misread by someone underwriting their first handful of properties. The fix isn’t a better cap rate table, it’s running the actual numbers: NOI, debt terms, growth assumptions, and exit pricing, on every deal you seriously consider.
Our free CRE calculators include a cap rate calculator along with NOI, cash-on-cash, and DSCR tools, so you can move past the headline number and see what a deal actually returns once financing and growth assumptions are in the picture.