Table of Contents
1. The Cap Rate Formula
The cap rate formula is straightforward but understanding its components is essential:
Basic Formula
Alternative Uses
Example Calculation
A retail building generates $600,000 NOI and is listed for $12,000,000:
2. NYC Cap Rate Benchmarks by Property Type
Cap rates vary significantly by property type, location, quality, and market conditions. Here are current NYC benchmarks (as of 2024):
Current NYC Cap Rates (2024)
Note: Cap rates fluctuate with interest rates, market conditions, and investor sentiment. These are general ranges—specific properties may trade outside these benchmarks.
3. What Affects Cap Rates
Multiple factors influence where a property trades on the cap rate spectrum:
Lower Cap Rates
(Higher prices)
- • Prime locations
- • Strong credit tenants
- • Long lease terms
- • New/renovated buildings
- • Below-market rents (upside)
- • Low vacancy risk
Higher Cap Rates
(Lower prices)
- • Secondary locations
- • Weaker tenant credit
- • Short lease terms / vacancy
- • Older buildings / deferred maintenance
- • Above-market rents
- • Operational challenges
Macro Factors
- Interest Rates: Higher rates generally push cap rates up as investors require higher returns
- Capital Availability: More available capital compresses cap rates through competition
- Economic Growth: Strong economies support lower cap rates through rent growth expectations
- Risk Perception: Uncertainty drives investors to demand higher returns (higher caps)
4. Using Cap Rates in Investment Analysis
Cap rates serve multiple purposes in real estate investment analysis:
Property Comparison
Compare properties of different sizes and prices on an apples-to-apples basis. A $50M building at 5% and a $10M building at 5% offer similar returns relative to investment.
Quick Valuation
Estimate property value by dividing NOI by market cap rate. If similar properties trade at 5% and your building has $500K NOI, estimated value is ~$10M.
Market Timing
Track cap rate trends to understand market cycles. Compressing cap rates indicate a heating market; expanding caps suggest cooling or correction.
Return Analysis
Going-in cap rate represents Year 1 unleveraged return. Compare to your required return threshold and cost of capital to assess attractiveness.
5. Limitations of Cap Rates
While useful, cap rates have important limitations:
- ✕Ignores Financing: Cap rate is unleveraged—your actual return depends heavily on loan terms
- ✕Static Snapshot: Uses current NOI; doesn't capture growth potential or lease rollovers
- ✕NOI Inconsistency: Different sellers calculate NOI differently; always verify assumptions
- ✕Excludes CapEx: Doesn't account for capital expenditure needs or reserves
- ✕One Metric: Should be used alongside IRR, cash-on-cash, and other metrics
Best Practice: Use cap rate for quick screening and comparison, but build a full pro forma with cash flows, debt service, and exit assumptions for actual investment decisions. Try our Cap Rate Calculator andNOI Calculator for analysis.
6. Frequently Asked Questions
Is a higher or lower cap rate better?
It depends on your investment strategy. Lower cap rates mean higher prices but typically indicate safer, more stable properties. Higher cap rates offer more income relative to price but usually come with more risk (weaker tenants, older buildings, secondary locations). Neither is inherently "better"—it's about matching risk/return to your goals.
Why are NYC cap rates lower than other cities?
NYC cap rates are compressed due to massive domestic and international investor demand, constrained land supply, strong historical appreciation, deep tenant demand, liquidity, and the market's safe-haven reputation. Investors accept lower current yields for perceived stability and appreciation potential.
What's the difference between cap rate and yield?
Cap rate specifically refers to NOI/Value (unleveraged). "Yield" can mean different things: cash-on-cash yield (cash flow/equity invested), dividend yield, or sometimes cap rate itself. Always clarify which yield metric is being discussed.
How do interest rates affect cap rates?
Higher interest rates typically push cap rates up. When borrowing costs increase, investors require higher property-level returns to maintain adequate spread. Historically, cap rates track about 200-400 basis points above 10-year Treasury yields, though this spread varies.