What Is a Cap Rate and Why Does It Matter in 2026?
A capitalization rate (cap rate) measures the income return on a property independent of financing: Net Operating Income ÷ Property Value. A $1M property generating $60,000 NOI has a 6.0% cap rate. Higher cap rates indicate more income return per dollar invested (and typically more risk or a softer market). Lower cap rates signal strong demand or compressed risk premium.
In 2026, cap rates have stabilized after the 2022–2024 expansion driven by rising interest rates. With 10-year Treasury at approximately 4.6% (Q1 2026), the spread between cap rates and risk-free rates remains compressed by historical standards—particularly for industrial and multifamily assets. Source: Federal Reserve H.15, CBRE Capital Markets Q4 2025 report.
Cap Rates by Property Type (Q4 2025 / Q1 2026)
Industrial and Logistics: 5.5–6.5%
Industrial remains the strongest-performing asset class. National average cap rate: 5.9% (CBRE Q4 2025). Infill logistics near major metros (LA, NJ, Chicago): 4.8–5.5%. Secondary markets (Memphis, Indianapolis, Columbus): 6.2–7.0%. E-commerce demand sustains low vacancy (5.2% nationally). New supply delivered in 2024–2025 has modestly softened rates from the historic lows of 4.5–5.0% seen in 2021–2022.
Multifamily: 5.0–6.0%
National average cap rate for garden apartments: 5.4%. Class A urban apartments in coastal markets: 4.5–5.2%. Class B suburban value-add: 5.5–6.5%. Sun Belt markets (Phoenix, Tampa, Austin) have seen mild cap rate expansion due to elevated new supply. Source: CoStar Multifamily National Report Q4 2025. Multifamily fundamentals remain strong: household formation, homeownership cost differential, and constrained new permits in most markets.
Retail Strip Centers: 6.5–7.5%
Grocery-anchored strip centers: 6.2–6.8% (tightest in retail). Unanchored neighborhood retail: 7.0–8.0%. Power centers and big box: 7.5–9.0%. Retail vacancy nationally: 4.1% (CoStar Q4 2025)—the lowest since 2007—driven by limited new construction and strong service/food tenant demand. Dollar stores and discount concepts continue expanding, supporting net lease valuations.
Office: 7.5–9.5%
Office remains the most distressed property type. Class A downtown trophy: 6.5–7.5% (prime assets). Class B suburban: 8.0–10.0%+. Distressed office transactions in major CBDs have traded at implied cap rates of 10–15%+, but these are asset-specific situations. National office vacancy: 19.8% (Cushman & Wakefield Q4 2025), the highest on record. Life science and medical office sub-sectors trade at 6.0–7.5% due to stronger fundamentals.
Self-Storage: 5.5–6.5%
Class A climate-controlled in major metros: 5.2–5.8%. Secondary markets: 6.2–7.0%. Self-storage rent growth has moderated from the 2021–2022 peak (+15%/yr) to approximately +2–3% nationally. Occupancy nationally: 88.7% (Yardi Matrix Q4 2025). Resilient demand profile during economic cycles makes this asset class a defensive holding.
Net Lease (NNN): 5.5–7.5%
Investment-grade single-tenant NNN (McDonald's, Dollar General, Walgreens): 5.5–6.2%. Non-investment-grade operators: 6.5–8.0%. NNN lease properties are priced heavily on tenant credit quality and lease term remaining. 10-year or longer remaining term commands 50–75 basis point premium. Source: Stan Johnson Company NNN Market Report Q4 2025, CBRE.
How to Use Cap Rates in Underwriting
Cap rate is a starting point, not a complete analysis. Key considerations: (1) Interest rate spread — your going-in cap rate should exceed your debt constant (annual debt service / loan amount) for positive leverage. At 7.5% debt constant and 5.5% cap rate, you have negative leverage. (2) Exit cap rate — model a 50–100 basis point cap rate expansion at exit to stress-test your IRR. (3) NOI growth — a below-market cap rate can still generate strong returns if NOI grows at 4–5%/yr from lease-up or rent bumps.
Sources: CBRE Capital Markets Q4 2025, CoStar Property Intelligence Q4 2025, Cushman & Wakefield MarketBeat Q4 2025, Yardi Matrix Q4 2025, Stan Johnson Company NNN Market Report, Federal Reserve H.15 Q1 2026.