Short answer
A cap rate (capitalization rate) is a property's annual net operating income divided by its purchase price or value. A property producing $150,000 of NOI and priced at $2,500,000 trades at a 6.0% cap rate. It is a pricing ratio, not a return: it ignores debt, future rent changes, capital costs and the sale price. In net lease real estate, lower cap rates signal stronger tenant credit and longer lease term; higher cap rates signal more risk.
Key Takeaways
- Cap rate equals net operating income divided by price, so the same income is worth more at a lower cap rate and less at a higher one.
- In single-tenant net lease, tenant credit and remaining lease term explain most of the difference in cap rates between two properties.
- The Boulder Group put the national asking cap rate for single-tenant net lease at 6.82% in Q2 2026, from 4.45% for top ground leases to 7.90% for office.
- The spread between net lease cap rates and the 10-year Treasury yield shows how much extra income investors demand for owning real estate risk.
- A cap rate is a snapshot of first-year income relative to price. It is not a total return and says nothing about debt, capital costs or exit value.
Formula
Cap rate = Net operating income / Purchase price (or value)
Rearranged, Value = NOI / Cap rate, and NOI = Value x Cap rate.
| Property value | |
|---|---|
| 5.5% | $2.7M |
| 6.0% | $2.5M |
| 6.5% | $2.3M |
| 7.0% | $2.1M |
| 7.5% | $2.0M |
Illustrative arithmetic to show the mechanism, not market data.
What a cap rate measures
A cap rate expresses a property's price as a yield: the unleveraged net operating income it produces in a year, divided by what a buyer pays for it. It lets investors compare buildings of very different sizes on one scale, and it is the single number most net lease properties are marketed and negotiated on.
The numerator is net operating income (NOI): rent and expense reimbursements, less the operating expenses the landlord actually bears, before debt service, income taxes and depreciation. The denominator is the purchase price, or an appraised value when the property is not being sold. Because the formula is a simple ratio, it can be solved three ways. Knowing any two of NOI, price and cap rate gives you the third, which is why brokers price a single-tenant listing by choosing a cap rate and dividing it into the rent.
A cap rate describes the first year only. It does not account for rent escalations, the loan used to buy the property, future roof or parking lot costs, or what the property sells for later. Those belong to other measures, covered below.
Worked example: one NOI, five cap rates
Holding income constant and changing only the cap rate shows how sensitive value is to this one input, and why buyers and sellers argue over a quarter point. In this hypothetical, a single-tenant building produces $150,000 of NOI under an absolute NNN lease, and nothing changes except the cap rate applied to it.
| Cap rate | Value (NOI / cap rate) | Change vs 6.0% |
|---|---|---|
| 5.5% | $2,727,273 | +9.1% |
| 6.0% | $2,500,000 | Base |
| 6.5% | $2,307,692 | -7.7% |
| 7.0% | $2,142,857 | -14.3% |
| 7.5% | $2,000,000 | -20.0% |
Two lessons come out of the table. First, a move of half a percentage point, which sounds small, changes value by 7% to 9% here. Second, the relationship is not linear: the same 50 basis point move is worth more dollars at low cap rates than at high ones. That is why a buyer paying a 5.5% cap rate carries more price risk per basis point than a buyer at 7.5%. The mechanics of those moves are covered in cap rate compression and expansion.
Why net lease cap rates differ by tenant and lease term
In single-tenant net lease, the building is usually a commodity and the lease is the asset. Two identical-looking properties trade at very different cap rates because buyers are pricing the probability that the rent keeps arriving and how long it is contracted to arrive. The two biggest inputs are the tenant's credit and the remaining lease term.
The Boulder Group's Net Lease Market Report for Q2 2026 (July 2026) shows the range by category. These are national asking cap rates:
| Category | Asking cap rate |
|---|---|
| McDonald's and Chick-fil-A ground leases | 4.45% |
| All corporate QSR | 5.85% |
| Auto sector | 6.45% |
| Retail (all) | 6.60% |
| All single-tenant net lease | 6.82% |
| All franchisee QSR | 6.85% |
| Industrial | 7.25% |
| Dollar store sector | 7.49% |
| Drug store sector | 7.85% |
| Office | 7.90% |
Credit shows up inside categories. Corporate QSR at 5.85% against franchisee QSR at 6.85% is a 100 basis point gap driven largely by who signs the lease. Within drug stores, the same report put CVS at 6.85% and Walgreens at 8.10%.
Term shows up just as clearly. The same report's median asking cap rate for CVS was 6.35% with 15 to 19 years remaining and 8.50% with under 5 years remaining; for corporate QSR it was 5.00% with 20 or more years and 6.85% with under 10. The Boulder Group also noted that shorter-term and non-rated product moved more selectively at wider spreads, while long-term, investment-grade supply stayed scarce, at less than 10% of retail listings. Location matters as well: Northmarq's Q2 2026 snapshot put the average single-tenant retail cap rate at 6.85%, ranging from 6.40% in the West to 7.58% in the Midwest.
Cap rates and the 10-year Treasury
Investors judge a cap rate against the yield on a 10-year US Treasury note, because a long net lease is, in part, a stream of fixed payments like a bond. The difference between the two, the spread, is the extra income demanded for tenant risk, illiquidity and the building itself.
The Federal Reserve's H.15 release shows the 10-year Treasury constant maturity yield at 5.18% on September 24, 2026. Against the Boulder Group's Q2 2026 asking cap rates, that implies a spread of roughly 164 basis points for all single-tenant net lease (6.82%), 142 basis points for retail (6.60%) and 67 basis points for corporate QSR (5.85%). The comparison is approximate because it pairs a second-quarter survey with a September yield, and the gap between those dates matters: the Boulder Group reported the 10-year settling near 4.40% during Q2, which put the overall spread closer to 240 basis points at the time. Ground leases at 4.45% now sit below the Treasury yield, which buyers accept because they expect to control the land, and often the building, when the lease ends.
When Treasury yields rise faster than cap rates, the spread narrows and net lease income looks less attractive relative to bonds, which tends to push cap rates up over the following quarters. Rates do not move cap rates one for one, however: spreads widen and compress with buyer demand, lender appetite and the supply of properties for sale. See the 10-year Treasury near 5% and commercial real estate.
Asking cap rates vs closing cap rates
An asking cap rate is the seller's list price divided into the property's rent. A closing cap rate is what a buyer actually paid. Many published net lease surveys, including the Boulder Group's national figures, report asking cap rates, so closed deals typically price somewhat higher and a survey figure is a ceiling on value, not a comp.
The Boulder Group measured the median gap between asking and closed cap rates in Q2 2026 at 22 basis points for retail, 22 for industrial and 50 for office. That gap widens when sellers price ahead of buyers, common after interest rates jump, and narrows when competition for good product is strong. Closing cap rates are better evidence of value but lag: a sale reported this quarter was usually priced months earlier.
Asking cap rates are also usually calculated on scheduled rent in the offering memorandum, not on NOI after the costs a buyer will actually carry. In a hypothetical case, a 6.50% asking cap rate on a lease with landlord roof and structure obligations could fall to about 6.2% once those costs are deducted. See how to read an offering memorandum.
The most common mistake: reading a cap rate as a return
A cap rate is not what an investor earns. It is first-year, unleveraged income divided by price, and a total return also depends on rent growth, debt, capital spending, the exit price and time. Two properties bought at the same cap rate can produce very different outcomes.
- Rent growth. A 6.0% cap rate on a lease with 10% increases every five years produces more income over time than a 6.0% cap rate on flat rent. IRR captures this; the cap rate does not.
- Debt. With a loan, the investor's yield on equity is cash-on-cash return. Whether borrowing raises or lowers it depends on positive leverage, the cap rate relative to the loan constant.
- Exit value. If the property sells at a higher cap rate than it was bought at, the sale can erase years of income. This is the exit cap rate assumption.
- Capital costs. Roofs, parking lots and HVAC replacements are outside NOI but come out of the owner's pocket unless the lease assigns them to the tenant.
A high cap rate is also not a bargain by itself. It is usually the market's price for weaker credit, shorter term, a harder-to-re-lease building or rent above market. The useful question is whether the extra yield is enough compensation for the specific risk that produced it.
Frequently Asked Questions
Q: What is a good cap rate for a net lease property?
A: There is no single good cap rate. It should match the risk: long leases to strong corporate credits trade at lower cap rates, and short leases, franchisee guarantors or hard-to-re-lease buildings trade higher. The Boulder Group reported a Q2 2026 national asking cap rate of 6.82% for all single-tenant net lease, with categories ranging from 4.45% for top ground leases to 7.90% for office.
Q: Is a higher cap rate better?
A: A higher cap rate means more first-year income per dollar of price, but it usually exists because the market sees more risk in the tenant, the lease term, the location or the building. It is better only if the added yield more than compensates for that risk.
Q: Does a cap rate include the mortgage payment?
A: No. Cap rate uses net operating income, which is calculated before debt service. It describes the property as if bought for cash. The return on an investor's equity after loan payments is measured by cash-on-cash return.
Q: How do interest rates affect cap rates?
A: Rising interest rates raise the yield available on bonds and the cost of debt, which tends to push cap rates up and values down over time. The relationship is not one for one; the spread between cap rates and the 10-year Treasury yield widens and narrows with investor demand and property supply.
Q: What is the difference between a cap rate and ROI?
A: A cap rate is a pricing ratio for one year of unleveraged income. Return on investment measures what an investor actually earns over the holding period, including rent changes, financing, capital costs and the eventual sale price.
Sources
- The Boulder Group, Net Lease Market Report Q2 2026 (July 2026)
- MBA NewsLink, Single-Tenant Net Lease Cap Rates Rise, Boulder Group Reports (July 2026)
- Federal Reserve, H.15 Selected Interest Rates (September 25, 2026 release)
- Northmarq, Single-Tenant Retail Market Snapshot, Q2 2026
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