Cap rates are the universal language of commercial and residential investment real estate, but they vary dramatically by market, property type, and economic conditions.
Why Cap Rates Differ by Location
Cap rates reflect investor risk perception and demand. Gateway cities (NYC, SF, LA, Boston) with massive demand and high barriers to entry often see cap rates of 3-5% for Class A properties. Secondary markets (Phoenix, Nashville, Charlotte) typically yield 5-7%. Tertiary markets and rural areas can see 7-10%+.
Rising Interest Rates and Cap Rate Compression
When the Fed raises rates, cap rates typically follow with a lag. If investors can earn 5%+ in risk-free Treasury bonds, they demand higher cap rates (more income) from real estate to compensate for the additional risk and illiquidity. This compresses property values when rates rise rapidly.
Asset Class Variation
- Multifamily: 4.5-6.5%
- Industrial/warehouse: 5-7%
- Retail strip centers: 6-8%
- Office: 6.5-9%+ (elevated post-COVID)
- Net lease (NNN): 5-7%
The best investors don’t chase the highest cap rate — they find markets where rental growth will compress cap rates over time, delivering appreciation returns on top of income.