Formula
Cap Rate = NOI / Property Value
Compare
| Cap Rate | Property Type | Implication |
|---|---|---|
| 3–4% | Core urban office, trophy assets | Low risk, low yield, high prices |
| 5–6% | Suburban office, quality retail | Moderate risk and return |
| 7–8% | Value-add multifamily, industrial | Higher yield, some repositioning needed |
| 9%+ | Distressed, secondary markets | High risk, potential high returns |
Key point
Lower cap rates mean higher prices (and lower yields). When investors say ‘cap rates are compressing,’ they mean property values are rising relative to income — real estate is getting more expensive.
Try it
Look up a REIT in **Fundamentals**. Estimate its portfolio cap rate: NOI / Total Property Value. Compare it to the 10-year Treasury yield — the spread is the risk premium for owning real estate.
Check-in
A property generates $100K NOI. At a 5% cap rate it’s worth $2M. If cap rates rise to 7%, what’s it worth?
Key insight
Check-in
A rental property generates $120K NOI. It sold for $2M last year and $2.4M this year — no improvements. What happened to the cap rate, and what's the market implying?
Check your understanding
Sit with the ideas.
An industrial property generates $720,000 in annual NOI. Comparable properties trade at a 6% cap rate. The 10-year Treasury yield is 4.5%. What is the implied property value, and what does the cap rate spread over Treasuries tell you?
Why: