What's In A Cap Rate? Unpacking The CRE Benchmark And What It Signals

Ask a broker what they sold a property for, and the answer is just as likely to be a percentage as a dollar figure.

Commercial real estate lives and dies by the capitalization rate. The simple calculation — net operating income divided by market or purchase price — is used as shorthand to describe the health and direction of properties, asset classes, markets and the entire sector. 

As capital begins flowing back into the market, cap rates are one of the clearest ways to see where investors are leaning in, where they’re pulling back and which sectors are repricing the fastest.

“Generally speaking, a lower cap rate is indicative of a more robust rent outlook and a more robust liquidity environment,” said Aaron Jodka, director of national capital markets research at Colliers. 

Cap rates fall as properties trade for higher multiples of their annual income, a signal of strong demand, and they stay compressed when investors have high conviction about the sector’s performance. As market fundamentals or sentiment deteriorates, cap rates tend to increase.

The weighted average cap rate across all asset classes in the U.S. was 6% at the end of September, the same as a year earlier, but there is a 5.2-percentage-point spread in cap rates across sectors.

“Some of these asset classes with a higher structural cap rate are perceived to have a higher risk involved with them, and you need to be compensated for said risk,” Jodka said. 

Among core asset types, industrial assets have the lowest average cap rates, at 5.1%, followed closely by apartments. Retail is in the middle of the pack, while the office and lodging sectors are the highest. The split is in line with how investors typically price in risk by sector. 

Although cap rates for office buildings are above historical averages, they slid 24 basis points year-over-year as the pool of buyers has deepened for trophy, opportunistic and distressed assets. The sector saw a 42% jump in transaction activity in the first half of the year, with just under $26B in deals. 

“Office was crossed off of a lot of investors’ lists, and now it's selectively on lists,” Jodka said.

Industrial and apartment cap rates grew by 10 basis points compared to last year, a modest bump that reflects short-term supply concerns after a glut of pandemic-era development in both sectors. 

Apartments historically trade at a higher volume than other sectors, and the asset class has held on to the top spot in 2025, capturing more than one-third of dollar volume, according to a third-quarter capital markets report from Colliers. 

“Many properties are still trading at low cap rates based on in-place income,” the Colliers researchers wrote. “Investors are showing confidence in their ability to push occupancy, manage operations more efficiently, and generate stronger income growth overall.” 

Fund managers have shifted portfolios more heavily toward industrial properties in recent years, drawn to long lease terms, low operating costs, consistent growth and what had been significant supply constraints before a 2021 development boom. 

The outlook in retail is more nuanced, in part because investors are increasingly aware of the wide divide in spending power across earning levels that has been described as a K-shaped economy. 

Private funds are increasingly buying into grocery-anchored retail for their perceived stability, which has narrowed cap rates for strip centers by 18 basis points year-over-year to 6.5%. 

“Everyone needs to eat,” Jodka said. “It's a fairly safe strategy, and when you have the right mix of tenants within that center, all of a sudden you have very complementary retail.”

A lack of new construction in recent years will further support pricing as more assets come to market in 2026, according to Colliers. 

“There's an argument to be made that retail is mispriced, that cap rates are too high, given its performance,” Jodka said, citing historically low vacancy and continued rent growth.

Alternative assets bookend the core sectors with the highest and lowest cap rates, reflecting the wide range of ongoing capital and operational support needed across sectors. Skilled nursing has the highest cap rates, at 9.7%, while cell and radio towers have the lowest rates, at 4.5%. 

“Skilled nursing is a real estate play, yes, but it’s also got a healthcare and staffing component there,” Jodka said.

Meanwhile, towers are essentially seen as infrastructure. 

Data centers sit just above the all-sector average at 6.1%, with cap rates expanding modestly from last year as sellers are forced to meet a market that is more interested in new construction.  

Cold storage saw the largest move this year. Cap rates jumped by more than a full percentage point to 7% after a year of outsized interest, including the public offering for Michigan-based Lineage Inc. The company now faces a lawsuit alleging it misled shareholders ahead of the IPO, fueling some skittishness in the sector.

Life sciences cap rates widened by 53 basis points as the sector works through a supply glut, while medical office cap rates contracted by 37 basis points to 6.5% amid strong demand.

Lodging, typically one of the more volatile sectors because of its sensitivity to travel trends, contracted by 28 basis points to 8.3% but continues to hold the second-highest cap rates behind skilled nursing. 

In the short term, cap rate trends will continue to be driven by sector-level nuance. But an influx of large players back to the market has already helped to lift average sales prices and will eventually have a meaningful impact on cap rates, Jodka said.  

“Once you start seeing that institutional capital, private equity, the international capital moving in, you'll start to see some solid cap rate compression,” he said.