The risk-free rate, meaning the yield on the 10-year US Treasury, is the floor under every commercial real estate cap rate. When it rises, the arithmetic says cap rates should rise with it and property values should fall. In 2026 the 10-year has climbed to roughly 5.3%, its highest level since 2002 (CNBC, October 6, 2026), and yet cap rates have barely moved. That gap between what the bond market is doing and what buyers are paying is the whole story, and it only closes two ways.
Here is how the pieces fit, and what else sets a cap rate besides the Treasury.
Start with the arithmetic
A cap rate is a property's first-year net operating income divided by its price. JPMorgan puts it plainly: $600,000 of NOI on a $14,000,000 building is a 4.3% cap rate. Flip it around and you get value: price equals NOI divided by cap rate. That second form is the one that matters when rates move, because the income is roughly fixed in the near term and the cap rate is the variable doing the work.
It helps to break the cap rate into its parts:
cap rate (roughly) = risk-free rate + risk premium - expected NOI growth
The risk-free rate is the Treasury. The risk premium is what a buyer demands on top of a government bond to accept the extra risk of a building: vacancy, tenant credit, illiquidity, capital expense. Expected NOI growth is a credit, because income you expect to rise is worth more, so you will accept a lower going-in yield for it. Industrial and apartments have carried low cap rates for years mostly because buyers penciled in strong rent growth.
The risk-free rate is the floor, and it just moved
A 10-year Treasury is the closest thing to a no-risk return over a holding period that resembles a real estate hold. No investor knowingly buys a building to yield less than a government bond without a reason, so the Treasury sets the baseline that every cap rate builds on.
That baseline has moved a lot. The 10-year sat near 5.3% on October 6, 2026, up about 0.47 points over the prior month and 1.14 points higher than a year earlier, touching levels last seen in 2002 (CNBC; TradingEconomics). The move has been driven by heavy Treasury issuance against the federal deficit, sticky inflation expectations, and a Fed that has signaled it is not done, per the same reporting and Crestwood Advisors' October 2026 update.
Three other things set the cap rate
The Treasury is the floor, not the whole number. Three other inputs decide where a given building prices above it.
Risk premium
This is the spread for the asset itself. A new apartment complex leased to hundreds of tenants on one-year leases prices differently from a single-tenant suburban office with a lease rolling in two years. CBRE's H1 2026 survey shows the range: stabilized New York multifamily around 5% to 5.5%, while Class A suburban office in Chicago widened to 10% to 12.5%. Same country, same Treasury, very different risk premium.
Growth expectations
Softer expected rent growth pushes a cap rate up, because you are no longer paying for income that climbs. CBRE flagged exactly this in multifamily, where the most bearish sentiment in its H1 2026 survey landed on infill apartments and lower-tier office.
Weight of capital
When a lot of money is chasing a narrow set of assets, buyers accept thinner spreads. That is most of why apartment and industrial cap rates have held even as the Treasury rose. The spread, not the cap rate, absorbed the move.
The math of a cap rate move
Value moves inversely to the cap rate, and at low cap rates a small change swings the price hard. Take a building throwing off $1,000,000 of NOI:
| Cap rate | Value (NOI / cap rate) |
|---|---|
| 5.5% | $18,181,818 |
| 6.0% | $16,666,667 |
| 6.5% | $15,384,615 |
Moving the cap rate from 5.5% to 6.5%, one full point, on the exact same income drops the value by $2,797,203, about 15.4%. The income never changed. The discount rate did. This is why a rising risk-free rate is a threat to value even when a property is leased and performing: the denominator reprices whether or not the building does.
Why cap rates have not followed the 10-year up
Here is the decoupling in one number. A year ago, with the 10-year near 4.2%, a 5.45% apartment cap rate carried a spread of roughly 125 basis points over Treasuries. Today, with the 10-year at 5.3% and that cap rate about the same, the spread is close to 15 basis points. The risk-free rate rose about a point and the spread gave back almost all of it.
CBRE saw the start of this in its H1 2026 survey: average cap rates barely budged even as the 10-year peaked at 4.67% in May, with the all-property median holding near 6.6%. About 60% of respondents expected no change over the next six months, though more expected increases than in the prior December 2025 survey. Most said the 10-year would need to fall to about 3.75% to spark renewed deal activity. Since that survey the Treasury has gone the other way, to 5.3%, which has stretched the gap further rather than closing it.
Where cap rates actually sit, by sector, from CRED iQ's 2026 CMBS new-issue data: multifamily 5.45%, industrial 6.03%, retail 6.81%, office 7.45%, and hospitality 8.02%. With a 5.3% Treasury, the multifamily number prices at almost no premium to a government bond, and core apartment deals below that level price through it.
How this resolves
A spread this thin does not hold indefinitely. It closes one of two ways. Either the 10-year falls back, which restores the premium without anyone touching the price, which is the outcome most survey respondents are waiting on. Or it does not fall, NOI growth has to actually show up to justify the yield, and where it does not, cap rates rise and values reset by the arithmetic above.
For how we underwrite it: we price the risk-free rate as a live input, not a constant, and we do not buy a thin spread on faith in rent growth we cannot defend. A 15 basis point premium over Treasuries is a bet on rates falling, not on the building. When we underwrite to a cap rate that holds up against a 5.3% Treasury, the deal survives being wrong about the Fed.
Sources
- CNBC, "Treasury yields slide as surge to multiyear highs cools," October 6, 2026
- TradingEconomics, US 10 Year Treasury Note Yield, government bond yield data
- Crestwood Advisors, "October 2026 Economic and Market Update: Higher and Higher: Bond Yields Rise to Levels Not Seen in Nearly Two Decades"
- CBRE, H1 2026 Cap Rate Survey (as reported by Yahoo Finance, "CBRE H1 2026 Cap Rate Survey Finds Sentiment Split")
- JPMorgan, "Cap Rates, Explained," Commercial Term Lending insights
- CRED iQ, 2026 CMBS new-issue cap rates by sector (as reported by CRE Daily)
Frequently Asked Questions
- What is the risk-free rate in commercial real estate?
- It is the yield on the 10-year US Treasury, the closest thing to a no-risk return over a holding period that resembles a real estate hold. Every cap rate builds on top of it, because no one knowingly buys a building to yield less than a government bond without a reason. On October 6, 2026 it sat near 5.3%, the highest since 2002.
- How does a higher risk-free rate lower property values?
- Value equals NOI divided by the cap rate. When the risk-free rate rises, cap rates tend to rise with it, and a higher cap rate on the same income means a lower price. On $1,000,000 of NOI, moving the cap rate from 5.5% to 6.5% drops value from $18,181,818 to $15,384,615, about 15.4%, with no change to the income itself.
- What influences a cap rate besides the risk-free rate?
- Three things: the risk premium for the specific asset (sector, tenant credit, lease term, condition), expected NOI growth (which lowers the cap rate because you pay for income you expect to rise), and the weight of capital chasing a sector, which compresses spreads when money piles into a narrow set of assets.
- Why have cap rates stayed flat while the 10-year Treasury rose in 2026?
- The spread absorbed the move instead of the cap rate. A year ago a 5.45% apartment cap rate was about 125 basis points over a 4.2% Treasury; with the 10-year now at 5.3% that spread is near 15 basis points. CBRE's H1 2026 survey found cap rates broadly flat, with about 60% of respondents expecting no change over the next six months.
- Where do cap rates sit by property type in 2026?
- From CRED iQ's 2026 CMBS new-issue data: multifamily 5.45%, industrial 6.03%, retail 6.81%, office 7.45%, and hospitality 8.02%. CBRE's survey showed wide ranges within sectors, such as stabilized New York multifamily near 5% to 5.5% versus Class A suburban Chicago office at 10% to 12.5%.