What is a Good Cap Rate? 2026 Cap Rate Ranges by Property Type
Published on October 27, 2025 | 7 min read
It's the most common question in commercial real estate: "What's a good cap rate?" The simple answer is that there's no single magic number. A "good" cap rate is entirely dependent on the market, the property type, its condition, and your personal risk tolerance. What might be an excellent cap rate for a Class A office building in Manhattan would be alarmingly low for a Class C apartment complex in a tertiary market. This guide will provide context, break down the average cap rates by property type for 2026, and help you interpret these crucial numbers like a seasoned pro.
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Defining a "Good" Cap Rate: It's All About Risk and Return
At its core, a cap rate represents the inverse relationship between risk and price. Think of it this way:
- Low Cap Rate (e.g., 4-5.5%): Implies higher price and lower perceived risk. Investors are willing to pay a premium for stability, predictability, and high-quality assets in prime locations. The return is lower, but it's considered safer.
- High Cap Rate (e.g., 8-10%+): Implies lower price and higher perceived risk. The property might be in a less desirable location, have significant vacancy, or require major renovations. The higher potential return is compensation for the investor taking on that extra risk.
Therefore, a "good" cap rate is one that accurately reflects the risk-adjusted return for a specific property in its specific market. It's not about finding the highest number, but about finding a number that makes sense for the deal.
2026 National Average Cap Rates by Property Type
Market conditions, interest rates, and investor sentiment cause cap rates to fluctuate. Below are the estimated national average cap rate ranges for major commercial property types in 2026. Remember, these are broad averages; your specific market could be higher or lower.
| Property Type | Gateway Market (Class A) | Secondary Market (Class B) | Tertiary Market (Class C) |
|---|---|---|---|
| Multifamily | 4.25% - 5.25% | 5.50% - 6.75% | 7.00% - 8.50% |
| Industrial | 4.50% - 5.75% | 6.00% - 7.25% | 7.50% - 9.00% |
| Retail | 5.00% - 6.50% | 6.75% - 8.00% | 8.25% - 10.00% |
| Office | 5.25% - 7.00% | 7.25% - 8.50% | 8.75% - 10.50% |
Factors That Influence Cap Rates
Cap rates are not set in a vacuum. Several factors push them up or down:
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- Geographic Location: A property in downtown Austin will have a much lower cap rate (higher price) than an identical property in a small rural town due to differences in demand, population growth, and economic stability.
- Asset Class & Quality: Multifamily and industrial are currently seen as less risky than office or some types of retail, leading to lower cap rates. Within an asset class, a brand-new Class A building will command a lower cap rate than an aging Class C building.
- Tenant Strength: A building leased long-term to a credit-worthy tenant like Amazon or Walgreens is extremely low-risk and will have a very low cap rate. A building with multiple small, local tenants on short-term leases is riskier and will require a higher cap rate.
- Interest Rates: When interest rates rise, borrowing becomes more expensive. To compensate, investors demand higher returns, which pushes cap rates up (and property values down).
How to Interpret Cap Rates in Context
Never analyze a cap rate in isolation. Always compare it to other data points:
💡 PRO TIP: Always Use Context
- Comparable Sales ("Comps"): What have similar properties in the immediate area sold for recently? This is the most important context. If comparable properties are trading at a 6.5% cap rate, and a seller is offering a property at a 5.5% cap, you need to understand why. Is it a superior asset, or is it just overpriced?
- Market Trends: Are cap rates in the area compressing (getting lower, indicating rising values) or expanding (getting higher, indicating falling values)? Understanding the direction of the market is crucial.
- Red Flags: Be wary of cap rates that seem too good to be true. An unusually high cap rate could signal hidden problems like major deferred maintenance, a troubled tenant base, or inaccurate financial reporting from the seller. Conversely, a very low cap rate may indicate the seller is using overly optimistic "pro-forma" numbers that don't reflect the property's actual performance.
By using a cap rate calculator and comparing your findings to market data, you can develop a keen sense of a property's true value and make more informed investment choices. For step-by-step instructions, see our guide on how to calculate cap rate. If you're evaluating multifamily assets specifically, check our multifamily property analysis guide.
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