What Counts as a Good Cap Rate, and for What

Good cap rate depends entirely on what property type, what risk level, what location, and what expected return the investor wants. A 6 percent cap rate is excellent on a credit tenant NNN retail property but weak on an aging industrial building. A 9 percent cap rate is aggressive on well leased Class A office but conservative on tertiary market strip retail. Rochester investors need property type context to evaluate whether specific cap rates make sense.

Industrial cap rates across the region. Class A modern industrial with long term credit tenants trades at 7 to 8 percent. Class B industrial with typical tenants trades at 8 to 9 percent. Class C older industrial with lease rollover risk trades at 9 to 10.5 percent. Owner user industrial without leases trades at different metrics because the buyer is using rather than investing.

Office cap rates. Well leased Class A office in Rochester Hills or Troy trades at 7.5 to 8.5 percent. Suburban Class A office trades at 8 to 9 percent. Class B office of any location typically trades at 9 to 10.5 percent. Class C older office trades at 10.5 percent or higher when it trades at all. Office has been the most cyclical property type since 2020 with cap rates widening as work from home adoption reduced office demand.

Retail cap rates. Grocery anchored shopping centers with national tenants trade at 6.5 to 7.5 percent. Neighborhood strip centers with local tenants trade at 7.5 to 8.5 percent. Older or poorly located strip trades at 9 to 11 percent. Single tenant NNN retail with credit tenants and long leases trades tightest, sometimes 5.75 to 6.75 percent for the best assets.

Multifamily cap rates. Class A newer apartment properties trade at 5 to 6 percent depending on submarket. Class B workforce housing trades at 5.5 to 6.5 percent. Older value add multifamily trades at 6 to 7.5 percent. Multifamily has been the tightest cap rate property type across cycles because of consistent demand.

Special use property cap rates. Self storage typically trades at 6.5 to 8 percent. Medical office trades at 6.5 to 8 percent. Restaurants trade at 6.5 to 8 percent for credit tenants and 9.5 percent or higher for local operators. Hospitality trades at 8 to 10 percent when it trades. Special use properties command wider spreads because tenant replacement is harder if the original tenant fails.

The location adjustment. Cap rates for the same property type vary by location within a market. Core Rochester area locations command tighter cap rates than outlying areas. Rochester Hills, Troy, and Bloomfield typically see tighter cap rates than outer submarkets. Location adjustments range from 25 to 200 basis points between core and secondary submarkets.

The lease term factor. Long term leases with credit tenants produce tighter cap rates than short term leases with local tenants. A property with 15 years remaining on a national credit tenant lease might trade 200 basis points tighter than the same property with 3 years remaining on a local tenant lease. Lease term is one of the strongest drivers of cap rate variation.

The condition adjustment. Newer buildings with modern systems and minimal deferred maintenance command tighter cap rates. Older buildings with capital needs command wider cap rates that partially compensate for the future capital expenditure. Michigan freeze thaw wear on parking lots and roofs makes condition differences more consequential than in milder climates.

The market timing factor. Cap rates change over market cycles. Michigan cap rates across property types have widened 75 to 200 basis points since 2022 as interest rates rose. What was good pricing in 2021 would be aggressive today. What is good pricing today may be different from what is good pricing in three years.

Michigan property tax uncapping consideration. When Michigan commercial property sells, taxable value uncaps to state equalized value. The buyer’s post sale property tax typically exceeds the seller’s, sometimes significantly on long held properties. Cap rates calculated off pre sale NOI understate the true buyer yield. Cap rates calculated off post sale NOI show the real return the buyer will see.

TDG Commercial, known as best commercial real estate agents in Rochester, provides current cap rate benchmarks by property type across Michigan submarkets to guide clients through pricing decisions.