A cap rate tracks the risk-free rate because every buyer compares a building's yield to what a US Treasury pays for doing nothing. When the 10-year Treasury rises, buyers want a higher cap rate to justify the risk of owning real estate instead, and a higher cap rate on the same income means a lower price. That is the whole engine in one sentence. The complication is that the link is loose, not mechanical: in the first half of 2026 the 10-year swung hard and average cap rates barely moved, because the gap between the two absorbed the shock. The cleanest way to think about a cap rate is risk-free rate, plus a risk premium for owning the asset, minus the income growth you expect. Change any one of those three and the cap rate changes.
First, the two numbers
The risk-free rate is what the US government pays to borrow. For commercial real estate the reference point is the 10-year Treasury yield, because a typical hold and a typical loan term line up with a ten-year horizon better than a 3-month bill or a 30-year bond. It is called risk-free because the government is assumed to always pay you back, so it is the floor every other investment is measured against.
A cap rate (short for capitalization rate) is a property's first-year net operating income divided by its price. Net operating income, or NOI, is the rent collected minus the cost of running the building, before debt and before taxes. A building that throws off $1,000,000 of NOI and sells for $16,666,667 trades at a 6.0% cap rate. The cap rate is the unleveraged yield: what the building earns on the full purchase price before any loan. Our Cap Rates and Value tool lets you slide NOI and cap rate and watch the price move, which is the same math laid out below.
The mechanism, and the math
Buyers do not set a cap rate in a vacuum. They start with the risk-free rate, add a premium to get paid for the things a Treasury does not carry (vacancy, tenants that leave, a roof that leaks, an asset you cannot sell in a day), and then subtract the income growth they expect, because a building whose rents are climbing is worth more than one whose rents are flat. So a 6.0% cap rate is roughly a 4.5% risk-free rate, plus a 3.0% risk premium, minus 1.5% of expected annual growth. Raise the risk-free rate and, if nothing else changes, the cap rate rises with it.
The reason this matters so much is that small moves in the cap rate are large moves in value. Hold NOI at $1,000,000:
| Cap rate | Value | Change from 6.0% |
|---|---|---|
| 6.00% | $16,666,667 | - |
| 6.25% | $16,000,000 | down 4.0% |
| 6.50% | $15,384,615 | down 7.7% |
| 7.00% | $14,285,714 | down 14.3% |
A quarter-point of cap rate, the kind of move a jumpy Treasury market can hand you in a week, is about 4% of the building's value. A full point is more than 14%. That is why owners and lenders watch the 10-year the way they do: the number itself is boring, but what it does to the denominator is not.
Why the link ran loose in 2026
If cap rates simply moved point for point with the 10-year, 2026 would have been a bloodbath. It was not. CBRE's H1 2026 Cap Rate Survey, which polls more than 200 of its professionals across more than 50 markets, found cap rates broadly flat even though the 10-year peaked at 4.67% in May. The shock absorber is the spread, the gap between the cap rate and the Treasury.
That gap is the risk premium, and it breathes. In late 2021 the average cap rate was about 5.2% while the 10-year yielded under 2%, a spread near 350 basis points (a basis point is one one-hundredth of a percent, so 350 of them is 3.5%). When Treasuries climbed through 2022 and after, that fat spread compressed instead of cap rates rising one for one, so values held up better than the Treasury move alone implied. By early 2026 the picture had flipped: CRE Daily reported all-asset cap rates around 6.3% against a 10-year in the 4.4% to 4.6% range, a spread of roughly 170 to 190 basis points, well below the long-run norm. Then the 10-year pushed to 4.97% by September 12, 2026, its highest since 2023, per CRE Daily. When the cushion is already thin, there is less room for the spread to keep absorbing, and more of the next Treasury move has to show up in the cap rate, which is to say in the price.
That is the real answer to what influences cap rates in today's market: the risk-free rate is high and sticky, and the spread that used to soften it is narrow. CBRE found roughly 60% of its respondents expect cap rates to hold over the next six months, but more now expect increases than did in the December 2025 survey, and the median respondent said the 10-year would need to fall to about 3.75% to restart deal flow.
What else sets a cap rate
The risk-free rate is the floor, not the whole building. Three other forces decide where a specific cap rate lands.
Expected NOI growth
This is the minus sign in the formula, and it is why two buildings on the same street trade at different cap rates. A property with below-market rents and leases rolling over soon has growth coming, so a buyer accepts a lower going-in cap rate for it. A fully-leased building at peak rents has less room, so it needs a higher cap rate to be interesting. Growth is set by supply and demand: the Southwest apartment markets working through the 2021 to 2023 construction wave have softer near-term growth today, while the collapse in new starts is rebuilding the growth story for 2027 and beyond.
The risk premium by asset and market
Not all real estate carries the same risk, so the premium over Treasuries is not one number. CBRE's H1 2026 survey showed the split plainly: neighborhood retail, hotels, and industrial led on cap rate compression, while infill multifamily and lower-tier office drew the most bearish views. Suburban Class A office in some Midwest markets was quoted at 10% to 12.5%, while stabilized multifamily in New York had widened only to the 5.0% to 5.5% range. Tenant credit, lease term, building quality, and the market's liquidity all feed that premium. A single-tenant building leased to an investment-grade credit for fifteen years prices close to a bond; a half-empty older office tower prices like the risk it is.
The cost and availability of debt
Most buyers use a loan, and loan pricing keys off the same Treasury curve plus a lender's own spread. When debt is expensive or scarce, the price a leveraged buyer can pay falls, which pushes required cap rates up even when the all-cash math has not changed. CRE Daily noted that CRE borrowing costs can reset with the Treasury market before the Federal Reserve moves the fed funds rate at all, which is why the 10-year, not the Fed, is the number that prices most deals.
What this means for an owner or a buyer
If you own, the value of your building is being repriced by a bond market you do not control, and the quarter-point math above is the exposure. If you are buying, the risk-free rate tells you the floor, but the spread and the growth story are where the work is: paying a thin spread over a 5% Treasury only makes sense if you genuinely believe the NOI growth that justifies it. We underwrite to the spread and the growth, not to a hope that the 10-year falls back to 2021 levels.
Sources
- CBRE, H1 2026 Cap Rate Survey (summarized via Yahoo Finance, "CBRE H1 2026 Cap Rate Survey Finds Sentiment Split")
- CRE Daily, "Cap Rates May Still Have Room To Rise In 2026"
- CRE Daily, "10-Year Treasury Nears 5%, Raising CRE Financing Risk"
- VAC Development, Cap Rates and Value tool (vacdevelopment.com/media/resources/cap-rate-explainer)
Frequently Asked Questions
- Does a cap rate move one for one with the 10-year Treasury?
- No. The cap rate is the Treasury yield plus a risk premium minus expected income growth, and the risk premium (the spread) breathes. In H1 2026 the 10-year swung and cap rates stayed broadly flat because the spread absorbed the move. The link is directional, not mechanical.
- How much does a quarter-point change in the cap rate change value?
- About 4%. At $1,000,000 of NOI, a 6.00% cap rate values the building at $16,666,667, while 6.25% values it at $16,000,000. A full point, from 6.00% to 7.00%, cuts value 14.3% to $14,285,714.
- What is the cap rate spread and why does it matter?
- The spread is the gap between a property's cap rate and the 10-year Treasury, and it is the premium you earn for owning real estate instead of a bond. When it is wide, it cushions rising rates. In early 2026 it had narrowed to roughly 170 to 190 basis points, below the long-run norm, so there was less cushion left.
- Besides interest rates, what influences a cap rate?
- Expected NOI growth (driven by supply and demand), the risk premium for the specific asset and market (tenant credit, lease term, building quality, liquidity), and the cost and availability of debt. That is why a suburban office can price at 10% while stabilized multifamily prices near 5%.
- Why do owners watch the 10-year Treasury instead of the Fed?
- The 10-year prices most CRE debt and sets the discount rate buyers use, and it can reset before the Federal Reserve changes the fed funds rate at all. The Fed moves short rates; the bond market moves the number that values the building.