Cap Rates by Property Type

You are comparing two deals, a 30-unit apartment building and a cold-storage warehouse, and you need to know which one is priced fairly. The answer is the cap rate by property type, and it is not a single number: it is a spread that runs from low-4s for a stabilized multifamily in a strong Sun Belt market to double digits for a struggling full-service hotel. Multifamily cap rates, industrial cap rates, office cap rates, retail cap rates, and hotel cap rates each reflect a different risk profile, tenant structure, and income durability. Compare them only within their own sector. A 6.5% office deal is not cheaper than a 5.5% apartment deal; it is a different risk class priced for a different expected loss. Typical ranges for the five main asset classes are provided, along with an explanation of why they differ and what to check before trusting a number.

The cap rate is a snapshot of current yield. The market prices risk through that yield. An asset with stable, long-term income from a credit tenant trades at a lower cap rate, meaning a higher price for each dollar of net operating income, than one with short leases and volatile occupancy. That is the whole mechanism: the cap rate moves inversely with the perceived quality of the income stream.

Three forces drive the spread between property types. The first is lease duration and rent growth potential. A 15-year net lease to a national tenant gives an investor predictable income but little upside, so it sells at a low cap rate. A 12-month lease on a downtown office floor gives the landlord repricing power next year, but also vacancy risk, so the market demands a higher yield. The second force is operational intensity. Apartments and warehouses are passive: tenants pay rent, the landlord handles a limited set of repairs, and the building runs on a few staff. Hotels are businesses disguised as real estate: you are selling rooms nightly, managing staffing, and dealing with group bookings, so the cap rate has to compensate for that work. The third force is the cost of turning over space. A retail vacancy can sit for a year while you pay taxes, insurance, and maybe a tenant improvement allowance for the next user. A multifamily vacancy turns over in weeks. Higher frictional costs mean higher required yield.

Interest rates matter here too, but they are not the whole story. Cap rates generally move with, but lag, the 10-year Treasury yield, because both a buyer and a seller anchor on the risk-free rate. When the 10-year rises, cap rates eventually follow, but the lag means an investor who buys early in a rising-rate cycle takes some mark-to-market pain. The relationship is covered in depth in the guide on cap rates and interest rates; here it is enough to know that the spread between the 10-year and the cap rate is the risk premium, and that premium varies by property type. A narrow spread on industrial means the market sees little risk in the income. A wide spread on hotels means the opposite.

The practical takeaway: do not compare cap rates across property types as if they were the same unit. A 7% retail cap rate and a 7% office cap rate are not equivalent yields. You are comparing a single-tenant building with one lease to a multi-tenant building with ten leases, and the risk of losing half your income in a downturn is not the same. The comparison only works within a sector, and even then only after you adjust for location, lease rollover, and building condition.

Why Multifamily Yields Are Low

Multifamily is the lowest-yielding major asset class. The income is the most diversified. A 50-unit building has 50 tenants, and while one vacancy does not move your NOI much, the real protection is lease term. Multifamily leases run 12 months, so you can reprice to market every year. In a rising-rent market your income grows faster than any long-term lease allows.

9% in the second half of 2025. Multifamily tends to trade at or below that composite. A Class B garden apartment in a secondary market might trade at 5.0% to 5.5%, while a brand-new high-rise in a coastal city could be at 4.0% to 4.5%. The spread is not a mispricing: the high-rise has lower operating expenses as a percentage of income, better rent growth, and a more liquid resale market.

Watch Expenses, Not Vacancy

The risk in multifamily is expense growth, not vacancy. Property taxes and insurance have risen faster than rents in many metros. A cap rate computed on last year's expenses will overstate your return. Check the trailing 12-month operating expenses against the pro-forma. Be skeptical of a seller who shows a 35% expense ratio when the market is at 45%. A 100-basis-point miss on expenses is a 100-basis-point miss on your cap rate.

Do not use a survey cap rate as a target. The survey rate is a benchmark for a generic, stabilized asset in a given market. Your property has specific issues: a below-market rent roll, a deferred maintenance item, or a location that floods. Adjust the survey rate by the risk factors the survey does not see, then compare your purchase price to the NOI that a competent buyer would use.

The Tightest Spread in the Market

Industrial cap rates are the tightest they have been in decades. The asset class has become the default safe option for institutional capital.4 to 1.8 percentage points of office, the widest sector spread in the survey's history. That spread is the market saying it expects e-commerce demand to keep filling warehouses while offices struggle with hybrid work.

Within industrial, the spread between old and new product is enormous. A modern logistics building with 32-foot clear heights, 50-foot column spacing, and 20 dock doors trades at a cap rate in the low-5s. A 1970s warehouse with 16-foot clear heights and no dock levelers trades at 7% or higher, if you can find a buyer. The reason is functionality: modern tenants will pay more rent per square foot for a building that handles automation, and they will sign longer leases to secure it. The old building is functionally obsolete, and the cap rate compensates for the risk that the next tenant is a low-margin user.

Location and Transaction Reality

The failure case for industrial is the wrong building in the wrong location. A warehouse in a secondary market with poor highway access looks cheap at a 7% cap rate, but you will struggle to re-lease it when the initial tenant leaves. The market has priced in e-commerce growth. The buyers who paid a 5.5% cap for a building in a tertiary market in 2023 are already feeling the pain. Stick to infill locations near major population centers. Do not stretch the cap rate to make a marginal deal work.

Industrial is also the asset class where the survey rate is most likely to diverge from actual transactions. The Cap Rate Survey is based on asking prices and vanilla assumptions. Real deals include leasing commissions, tenant improvements, and sometimes a rent-free period. The effective cap rate on a closed deal can be 50 to 150 basis points higher than the survey suggests. Ask your broker for closed comps, not just listings, and adjust for any concessions the seller provided.

The Grocery Anchor Dynamic

Retail cap rates sit between industrial and office, at roughly 6.2% to 6.8% in the second half of 2025. The average hides a huge split between the two ends of the market. A grocery-anchored neighborhood center with a strong tenant roster trades at a cap rate in the low-6s. A strip center anchored by a failing discount store trades at 8% or higher and may not trade at all. The market has stopped treating retail as one asset class, and so should you.

The grocery anchor is the key. A center with a dominant grocer, one that has 30% or more market share in its trade area, has a defensible income stream because the grocery store drives foot traffic that benefits the smaller shops. Those small-shop leases, often 1,200 to 3,000 square feet, generate the majority of the center's profit per square foot. They renew at market rents if the center is healthy. The cap rate on the whole center reflects that dynamic. A center with a weak grocer or a dark anchor trades at a much higher yield to compensate for the lease-up risk.

Lease Rollover Risk

Retail's real problem is lease rollover. A typical retail lease runs 5 to 10 years. When it expires, the tenant may leave, downsize, or demand a rent cut. Unlike multifamily, where you can re-lease a vacant unit in weeks, a retail vacancy can take 6 to 12 months to fill. You may need to spend on tenant improvements or pay a leasing commission. The cap rate has to cover that frictional cost, which is why retail yields are higher than multifamily despite similar rent growth potential.

Do not buy a single-tenant retail property unless you understand the tenant's credit. A Walgreens or CVS lease at a 5% cap rate looks safe until the tenant closes the store and you are left with a dark building that no one else wants. The cap rate on a single-tenant net lease is a function of the tenant's credit rating, not the building. A B-rated credit tenant with a 20-year lease should trade at a yield that reflects the risk of default. If you want the safety of a long-term lease, buy a portfolio of them, not one.

The Highest Yields, Still Rising

Office cap rates are the highest of the five main asset classes, and they are still rising. The Cap Rate Survey put office at 7.0% to 7.6% in the second half of 2025. That average includes a bifurcated market. Class A trophy buildings in major downtowns trade at 6.5% to 7.0%. Class B and C buildings in secondary locations trade at 9% to 12%, if they trade at all. The spread reflects the market's view that hybrid work has permanently reduced demand for older, less efficient office space.

The office risk is lease duration and vacancy. Office leases run 5 to 10 years. Tenants have the right to sublease, so a tenant can walk away from a lease if they find a cheaper space. That has happened at scale: companies are giving back space as leases expire, and the vacancy rate in many downtowns is at record highs. A cap rate on an office building is only as good as the assumption about the rent you will get when the current lease expires. That assumption is under pressure.

The Value-Add Trap

The failure case for office is the value-add play that was supposed to work. A buyer acquires a Class B building at a 9% cap rate, plans to renovate and lease it up, and then discovers that the cost of tenant improvements and leasing commissions exceeds the rent the market will pay. The building sits half-empty, the debt matures, and the lender takes it back. This is not a hypothetical: it is the dominant outcome for office in 2024 and 2025. If you are looking at office, the question is not whether the cap rate is high enough, but whether the building has a reason to exist in 10 years. A building with a walkable location, good light, and efficient floor plates has a chance. A building in a suburban office park without amenities does not.

Office is also the asset class where the survey rate is most misleading. The Cap Rate Survey is based on asking prices. Owners who do not want to sell at a loss simply do not list. The actual transaction cap rates on closed office deals are often 100 to 200 basis points higher than the survey, because the buildings that trade are the ones where the seller has accepted reality. If you want to know what office is really worth, look at the recent sales comps, not the survey.

Business Risk in a Real Estate Package

Hotel cap rates are the highest of the major asset classes, often 8% to 12% for full-service properties. They should be. A hotel is a business: you are selling rooms nightly, managing staffing, and dealing with group bookings. The income is not a lease but a series of one-night transactions. The cap rate has to compensate for the operational risk, the volatility, and the fact that a hotel has no long-term tenants to anchor the value.

The typical full-service hotel trades at a cap rate in the high-8s to low-teens. The range is wide because the quality of the operator matters as much as the building. A well-run limited-service property with a strong brand flag might trade at 7%. A struggling full-service hotel with a weak flag and deferred maintenance trades at 12% or higher. The cap rate alone does not tell you which is which. Look at the historical occupancy and average daily rate, and the quality of the management team.

Hotels are also the asset class where the cap rate is most likely to be wrong on the upside. A hotel owner will show you a pro-forma with 75% occupancy and a $200 average daily rate, but the actual performance may be 65% and $180. The cap rate is only as good as the NOI assumption, and hotel NOI is the most volatile of any asset class. Use trailing 12-month actuals, not the pro-forma. Be skeptical of any owner who claims they can improve occupancy without additional capital.

Specialty assets, such as self-storage, medical office, and student housing, trade at cap rates that reflect their specific risk profiles. Self-storage, which has low operating expenses and minimal tenant improvements, trades at 5% to 6%. Medical office, which has credit tenants but high build-out costs, trades at 6% to 8%. Student housing, which has a seasonal lease and a single-use building, trades at 6% to 9%. These are not comparable to the five main classes. Treat them as a separate analysis.

You cannot compare a 6% multifamily deal to a 7% industrial deal by looking at the cap rate alone. The risk profiles are different. Use the cap rate as a starting point and adjust for three things: the quality of the income, the cost of turning over space, and the exit cap rate.

First, quality of income. A 6% cap rate on a 50-unit apartment building with 5% rent growth is better than a 6% cap rate on a single-tenant industrial building with no rent growth, because the apartment income will grow. Look at the lease rollover schedule and the market rent growth. Ask what the cap rate would be if you marked the rents to market. Second, cost of turning over space. A multifamily vacancy costs you a month of rent and a small marketing fee. A retail vacancy costs you a year of rent, a tenant improvement allowance, and a leasing commission. The higher the frictional cost, the higher the cap rate needs to be.

Third, exit cap rate. The cap rate you use to estimate the resale value in 5 or 10 years is the terminal cap rate. It should be higher than the going-in cap rate to reflect the risk of the future. If you buy at a 6% cap and sell at a 6.5% cap, the value declines by about 7.7% (since 1/0.065 ÷ 1/0.06 ≈ 0.923, meaning the sale price is roughly 92.3% of the purchase price, a drop of about 7.7%), and that can wipe out your cash flow. A property type with a widening cap rate spread, such as office, is a warning sign. A property type with a stable or compressing cap rate, such as industrial a few years ago, is a tailwind.

The practical instruction is this: pick one property type and become an expert in it before you diversify. The cap rate by property type is a starting point, not a rule. The only way to know if a deal is priced fairly is to know the comps in that specific market and asset class. Read the Cap Rate Survey for the current ranges, but do not buy a deal because it is in the range. Buy it because the income is durable, the rent is at market, and the exit cap rate is not going to surprise you.