Cap Rate Benchmarks by Commercial Property Type

The cap rate by property type in commercial real estate varies because each category faces distinct tenant demand, lease durability, and obsolescence risks. Office properties trade at one yield; industrial warehouses at another. Understanding why these spreads exist is essential to valuing a deal and assessing whether a higher cap rate reflects genuine risk or market mispricing.

Why Cap Rates Diverge by Property Type

The cap rate is net operating income divided by purchase price. A higher cap rate means lower price relative to income—which signals either higher risk, lower growth expectations, or genuine market dislocation. Why does the market price office buildings to yield 6% but industrial warehouses to yield 4%?

The answer lies in tenant stability and functional durability. An industrial warehouse leased to a major logistics operator on a 10-year triple-net lease (tenant pays rent, taxes, insurance, maintenance) is a predictable cash machine. The lease is long, the tenant is creditworthy, and the property itself—a big rectangle with a roof—is hard to make obsolete. Even if the current tenant leaves, warehouses are flexible; they can be reused for different supply chain functions.

Office buildings, by contrast, face existential uncertainty post-2020. Remote work, hybrid schedules, and the rise of flexible serviced offices have eroded demand. A 1990s mid-rise office tower in a secondary city is at risk of functional obsolescence. A new, Class A office building in a major CBD commands a low cap rate because scarcity and amenities support rents. But an aging suburban office park with spotty occupancy will yield 7–8% or higher—the market is pricing in the risk that tenants won’t renew and the building will struggle to backfill.

Industrial & Logistics

Industrial properties—warehouses, distribution centers, light manufacturing—have enjoyed the lowest cap rates among all commercial categories since the 2010s. Why?

Supply chain permanence. Amazon, UPS, DHL, and other logistics networks need physical space. This is not a discretionary service that evaporates in a recession. Tenants sign long leases (often 10–15 years), and rents are typically indexed to inflation, protecting landlord income.

Lease security. Most industrial properties are leased to investment-grade or near-investment-grade operators. Default risk is low.

Land-use scarcity. Suitable sites for logistics—near highways, ports, or urban centers—are finite. New industrial supply is capital-intensive and slow to build, providing some natural demand/supply balance.

Functional simplicity. A warehouse is a warehouse. It does not become obsolete; it is redeployed. Unlike an office tower designed for a specific architectural era, industrial buildings have long serviceable lives.

Typical cap rates: 3.5–5.5%, with the lowest rates in prime locations (near Los Angeles ports, Dallas-Fort Worth, Northern New Jersey) where scarcity is acute.

Multifamily (Apartments & Multibuild Rental)

Multifamily properties—apartment buildings, garden complexes, workforce housing—also trade at relatively low cap rates (3.5–5.5% in stable markets) because of:

Diversified tenant base. Unlike a single-tenant office building, an apartment complex has dozens or hundreds of tenants. If one apartment becomes vacant, others generate income. This natural diversification reduces idiosyncratic risk.

Frequent lease renewal. Apartment leases are typically 12 months. While this means higher tenant turnover and management cost, it also allows the landlord to reset rents quickly as market conditions change. During inflation, a multifamily owner can raise rents at renewal; an office building with a 10-year fixed-rate lease cannot.

Permanent housing demand. People always need to live somewhere. Multifamily demand is less cyclical than office demand (which contracts during recessions as companies downsize floor space).

Renovation upside. A dated apartment building can be meaningfully improved—new kitchens, bathrooms, appliances, finishes—to justify higher rents. This value-add potential attracts capital.

The spread narrows in markets with rent-control policies or where multifamily oversupply is acute. Conversely, in supply-constrained markets (e.g., coastal metros with zoning restrictions), multifamily cap rates can compress below 3.5%.

Retail

Retail has historically traded at mid-range cap rates (5.0–8.0%), but the spread has widened since 2015 as e-commerce cannibalized brick-and-mortar foot traffic.

Tenant credit risk. Traditional retailers—department stores, specialty chains—have faced widespread bankruptcy and store closures. A shopping center anchored by a department store that goes bankrupt leaves the property orphaned. Landlords are exposed to tenant credit risk in a way that, say, industrial landlords are not.

Functional inflexibility. A retail building is designed for retail; redeployment is costly. Converting a failing shopping center to offices or apartments requires capital investment and regulatory hurdles. Conversely, an industrial building repurposed for another logistics use is straightforward.

Anchor dependency. Many enclosed malls and shopping centers depend on “anchor tenants” (department stores, supermarkets, big-box retailers) to draw foot traffic. Loss of an anchor creates a spiral of declining traffic and vacancy.

Secular headwinds. Online shopping has permanently shifted demand away from physical retail. While e-commerce-resistant categories (grocery, health/beauty, dining) still support some retail property, the overall category is in structural decline.

Geographic variation. Neighborhood-serving retail (grocery-anchored centers, drugstores, local restaurants) in dense, walkable areas trades at lower cap rates (5–6%) because of stable demand. Destination retail (malls, power centers dependent on big-box anchors) trades higher (7–8%+).

Office

Office properties have experienced the most dramatic cap rate widening in recent years.

Structural vacancy. Post-2020, many office workers adopted hybrid or fully remote arrangements. Employers have begun shrinking office footprints rather than expanding them. Vacancy rates spiked to 10–15%+ in secondary markets and secondary-tier buildings in major cities.

Obsolescence risk. An office building built in the 1980s with a central core, small windows, and poor flexibility for open-plan layouts is at risk of functional obsolescence. Tenants want buildings with outdoor terraces, high ceilings, abundant natural light, and adaptable spaces. Retrofitting is expensive.

Lease length risk. Unlike industrial leases (10–15 years), office leases are often 5–7 years. When a major tenant does not renew, the landlord faces a re-leasing period with vacancy and re-leasing costs.

Geographic divergence. Class A office in CBDs (New York, San Francisco, London) still attracts capital and lower cap rates (4.5–5.5%) because of scarcity and prestige tenancy. Secondary office and suburban office face much higher cap rates (6.5–8.0%+).

Post-2024, some office properties in weak markets have been sent into foreclosure or marked for redevelopment (conversion to residential). Properties generating only 6–7% cap rates are at risk if interest rates remain elevated.

Hospitality

Hotels and lodging are the riskiest category, trading at the highest cap rates (6.0–10.0%+).

Operator dependent. Hotel performance depends heavily on the management company. Unlike a leased apartment building (where rent is paid regardless of property condition), a hotel operator is responsible for marketing, staffing, amenities, and service. Poor management destroys value; good management creates it.

Cyclical occupancy. Hotel occupancy rates move with economic cycles and travel demand. A recession, a pandemic, or a supply shock (competitor opening nearby) can quickly halve revenues. A multifamily building can maintain income even if one unit is vacant; a hotel with 30% occupancy loses 30% of room revenue.

High operating costs. Hotels require daily housekeeping, 24/7 security, front-desk staff, maintenance, and constant capital expenditure on furnishings and systems. Operating expense ratios (OpEx as % of revenue) run 40–60%, versus 25–40% for multifamily.

Capital intensity. Renovating a hotel is expensive and disruptive (rooms are out of service during renovation). Amenities that seemed state-of-the-art (curved hallways, dated tech) become liabilities.

Interest-rate sensitivity. Hotels depend on financing for growth and renovation. Rising interest rates directly compress IRRs and reduce investor demand.

Comparing Cap Rates Across Types

A simplified snapshot (approximate, and varying by submarket):

The spreads contract during growth phases (capital abundant, risk appetite high) and expand during downturns or when structural shifts (like post-2020 remote work) alter demand.

What Drives Spread Widening or Tightening

Capital availability. When institutional investors (pension funds, insurance companies, sovereign wealth funds) have ample capital and are hunting for yield, they push cap rates down across all categories—but especially in perceived “safe” categories like industrial, which compresses already-tight spreads.

Interest rate environment. Lower cap rates reflect partly the opportunity cost of capital. When 10-year Treasuries yield 2%, a 4% office cap rate seems attractive. When Treasuries yield 5%, cap rates must rise to stay competitive.

Supply/demand imbalances. Industrial has had undersupply; cap rates have stayed compressed. Retail has had oversupply and structural headwinds; cap rates have expanded.

Sentiment shifts. The discovery that remote work is durable—a 2021 realization—shifted sentiment against office, widening office cap rates and compressing apartment cap rates (as investors fled office into the “safety” of multifamily).

See also