What is a Good Cap Rate? Benchmarks by Property Type

"What's a good cap rate?" may be the question real estate investors ask most often, and the honest answer is that it depends. This guide gives concrete benchmarks and a framework for judging whether the cap rate on a specific deal makes sense.

Why Cap Rates Vary So Much

A cap rate reflects what buyers expect in risk and return. Lower cap rates point to:

• Lower perceived risk
• Higher demand from buyers
• More stability expected
• Higher prices relative to income

Higher cap rates point to:

• Higher perceived risk
• Less buyer competition
• More uncertainty
• Lower prices relative to income

So a 4% cap rate in Manhattan isn't "bad," and a 12% cap rate in a small town isn't necessarily "good." The two numbers describe entirely different risk profiles.

2024-2025 Cap Rate Benchmarks by Property Type

Multifamily

Multifamily remains relatively compressed thanks to housing demand and institutional investor interest.

Industrial/Warehouse

Industrial has been commercial real estate's favorite sector, though cap rates have expanded slightly from 2021-2022 lows.

Retail

Retail pricing swings widely depending on tenant mix and format.

Office

No sector has seen cap rates expand more since 2020 than office, largely because of uncertainty about remote work.

Single-Family Rentals

Build-to-rent communities usually trade tighter (at lower cap rates) than scattered-site portfolios.

How Location Affects Cap Rates

By Market Tier

The Risk-Return Logic

Gateway cities command lower cap rates because they offer:

• Deeper buyer pools (more liquidity)
• Diversified economies
• High barriers to entry
• Established rent growth track records

Smaller markets have to offer higher cap rates to compensate for:

• Less institutional demand
• Economic concentration risk
• Lower liquidity (harder to sell)
• Less predictable appreciation

The Cap Rate vs Interest Rate Relationship

For leveraged investors, the spread between cap rate and borrowing cost matters.

Positive leverage means the cap rate is higher than the debt cost. With $100K of NOI on a 6% cap rate (a $1.67M property) and 5% debt costs, the result is positive cash flow.

Negative leverage means the cap rate is lower than the debt cost. With $100K of NOI on a 5% cap rate (a $2M property) and 7% debt costs, the result is negative cash flow (without a sufficient down payment).

Higher interest rates in 2023-2025 pushed many deals into negative leverage, which forced either cap rates to expand or prices to fall.

Historical Context

Cap rates tend to follow interest rates, with a lag. The 2022-2023 rate spike pushed cap rates higher, and future rate cuts could compress them again.

How to Evaluate Cap Rates

Step 1: Compare Apples to Apples

A Class A multifamily cap rate tells you nothing about a Class C office building. Compare properties that share the same:

• Property type
• Class/quality
• Market
• Risk profile

Step 2: Understand What's Included

Sellers and brokers don't all calculate NOI the same way. Ask:

• Are reserves included in expenses?
• Is management normalized (or owner-operated)?
• Are any one-time expenses excluded?
• Is occupancy stabilized?

An artificially low expense load inflates NOI and makes the cap rate look better than it really is.

Step 3: Consider Going-In vs Exit

The "going-in" cap rate is the one you buy at, and the "exit" cap rate is the one you sell at. Buy at 6% and sell at 7%, and you take a hit to value even if NOI has grown in the meantime.

Conservative underwriting assumes an exit cap rate 0.25-0.50% higher than the going-in rate (cap rate expansion).

Step 4: Risk-Adjust Your Target

Each additional risk factor should push the cap rate you require higher:

Common Cap Rate Mistakes

1. Assuming High Cap Rate = Good Deal

A 10% cap rate can be a sign of real trouble, such as high vacancy, deferred maintenance, a declining market, or broader economic risk.

2. Assuming Low Cap Rate = Bad Deal

A 4.5% cap rate in a high-growth market with strong appreciation might outperform an 8% cap rate in a stagnant one.

3. Ignoring Cap Rate Trends

If you buy at today's 5% cap rate and the market is moving toward 6%, you start with a paper loss.

4. Using Asking Price Cap Rates

Sellers calculate cap rates from their asking prices. The real cap rate is based on the price a property actually trades at.

5. Not Adjusting for Rate Environment

A cap rate that looked good when interest rates were 3% may not look good at 7%.

Key Takeaways

• A "good" cap rate depends on property type, location, and risk profile
• 2025 ranges: Multifamily 4.5-7.5%, Industrial 4.5-8%, Office 5.5-12%+, Retail 5.5-12%+
• Higher cap rates signal higher risk and return; lower cap rates signal stability
• Compare only similar properties in similar markets
• Cap rates move with interest rates, usually with a lag
• A high cap rate isn't automatically good, and a low cap rate isn't automatically bad
• The real question is whether the cap rate fairly compensates you for the specific risks

Your own target will depend on your risk tolerance, your goals, and the deal in front of you. Treat these benchmarks as a starting point, then find out what is driving a given property's cap rate before you decide whether it makes sense.