The unlevered yield on a stabilized real estate asset.
The Capitalization Rate (Cap Rate) is the ratio of a property's net operating income to its market value, expressed as a percentage. It is the single most-used valuation metric in commercial real estate — effectively the unlevered yield a buyer would earn on a stabilized asset paying cash.
A cap rate is essentially the "yield" of a real estate asset. A 7% cap rate means the property generates 7% of its purchase price in NOI each year — what a buyer paying all cash would earn before financing, taxes, and any value appreciation. Cap rates move inversely with value: lower cap rates mean higher prices (and lower yields), higher cap rates mean lower prices (and higher yields).
Cap rates compress in strong markets and expand in weak ones. From 2014–2021, cap rates compressed sharply across every asset class as interest rates fell and capital flooded into real estate. Since 2022, rising interest rates have driven cap rate expansion of 100–250 basis points across most asset classes — meaning prices have come down meaningfully even where NOI has held up.
Cap rates vary materially by asset class and market. Multifamily historically prices tightest (5–6.5% in primary markets), followed by industrial (5.5–7%), retail (6.5–8.5% depending on tenant credit), and office (7–10%+ post-2020). Within each class, primary markets price 100–200 bps lower than secondary, which price 100–200 bps lower than tertiary.
Cap rate is also the standard back-of-the-envelope valuation tool: take NOI, divide by your assumed cap rate, and you have an implied value. A property generating $250,000 of NOI valued at a 7% cap is worth approximately $3.57M; at a 6% cap it's worth $4.17M. That 100-bps sensitivity is exactly why cap rate movement matters so much to valuations.
| Purchase price | $3,750,000 |
| Annual gross rental income | $485,000 |
| – Vacancy & credit loss (5%) | ($24,250) |
| Effective gross income | $460,750 |
| – Operating expenses (40%) | ($184,300) |
| Net Operating Income (NOI) | $276,450 |
| Cap Rate = $276,450 ÷ $3,750,000 | 7.37% |
There's no universal answer — it depends on asset class, market, and risk appetite. A 5% cap rate on a top-market multifamily property is "good" because the underlying value and rent growth justify it. A 5% cap on a tertiary-market retail strip would be highly aggressive. Compare cap rates within the same asset class and market.
Cap rate is unlevered (assumes all-cash purchase) and based on property value. Cash-on-cash return is levered (after debt service) and based on actual cash invested. A 7% cap rate property with leverage often produces a 12–15% cash-on-cash return.
No. Cap rate is unlevered — it uses NOI, which is calculated before any mortgage payment. Including debt service would conflate the property's yield with the borrower's financing decision.
Real estate competes with bonds for capital. When risk-free Treasury yields rise, investors demand higher cap rates on real estate to compensate for taking property risk. The spread between cap rate and the 10-year Treasury historically averages 200–400 bps depending on asset class.
CoStar, RealPage, Marcus & Millichap, CBRE, and other major brokerages publish quarterly cap rate surveys by asset class and market. Local broker BOVs (broker opinions of value) on comparable closed transactions are also a reliable source.
Matrix funds acquisitions and refinances across the cap rate spectrum — from sub-6% trophy multifamily to 9%+ value-add commercial. We size to the deal, not a blanket box.
