If you want a single magic number, you’ll be disappointed. “Good” depends on risk, leverage, and what you could earn elsewhere. In 2025, borrowing costs are still elevated, so spreads matter more than ever. A return is good when it beats your cost of debt by a safe margin, pays you today, and won’t blow up in a downturn. Put simply: the target is a risk-adjusted spread you can live with-backed by real cash flow.
Most investors anchor on three figures: cap rate (unlevered), cash-on-cash (levered cash yield), and IRR (total performance over time). They work together. Ask yourself: does this deal give me a healthy spread over my interest rate, enough cash flow to sleep at night, and enough upside to be worth the hassle?
Here’s the short answer you came for: across stable U.S. markets in mid-2025, solid assets often trade near 5.5%-8% cap rates depending on type and location; stabilized cash-on-cash sits around 6%-12%; and 5-10 year levered IRRs of 12%-18% are realistic for core-plus/value-add if you buy right and operate well. What counts as “good” is the part that beats your debt cost and compensates your risk.
rate of return on commercial property
TL;DR
- Target a cap rate at least 150-300 bps above your all-in interest rate, with DSCR ≥ 1.25x on realistic NOI.
- Stabilized cash-on-cash: 6%-12% for most income-focused deals in 2025; value-add starts lower but aims higher post-stabilization.
- Levered IRR: 12%-16% for core-plus; 15%-20% for value-add if execution is strong; 20%+ for opportunistic with higher risk.
- Benchmarks vary: Industrial often trades tighter than retail; office needs big discounts or story.
- Good = durable cash flow, resilient DSCR under stress, and a clear path to NOI growth.
What “good” really means in 2025
Rate of return on commercial property - the performance of a commercial real estate investment measured by current income and appreciation, commonly expressed as cap rate, cash-on-cash return, and IRR.
In 2025, interest rates remain higher than the 2010s average. That shifts two fundamentals: cap rates rose from early-2022 lows, and lenders want stronger cash flow coverage. Your bar for “good” should clear your financing costs comfortably and still pay you after reserves and CapEx. If the pro forma only works with heroic rent growth or tiny vacancy, it’s not good-it’s fragile.
Know your core metrics
Capitalization rate (Cap rate) - NOI divided by purchase price; an unlevered yield that proxies market risk and pricing. Formula: Cap = NOI / Price. Typical 2025 ranges by type: ~5.5%-7.5% industrial, ~5%-7% multifamily (market-dependent), ~6%-8% retail, ~7%-10%+ office, ~7%-10% hospitality (variable).
Cash-on-cash return - annual pre-tax cash flow after debt service divided by total equity invested. It captures the pay-check to the owner. Typical stabilized 2025 range: 6%-12%, depending on leverage, rate, and capex needs.
Internal rate of return (IRR) - the annualized total return including cash flow and appreciation over a holding period. Common targets: 12%-16% for core-plus, 15%-20% for value-add with real execution risk, 20%+ for opportunistic.
Net operating income (NOI) - revenue minus operating expenses (before debt service and taxes). It drives both value (via cap rate) and debt sizing. Attributes: rent roll quality, vacancy, expense ratio, recoveries, and rent escalations.
These metrics are linked. Higher leverage can raise cash-on-cash and IRR, but might squeeze DSCR and add refinancing risk. A high cap rate doesn’t equal a good deal if the tenants are weak or expenses balloon. Always tie each metric back to cash durability.
Benchmarks by asset type and risk profile (2025)
Ballpark ranges assume stabilized, institutional-size markets. Local dynamics can push you above or below.
- Industrial: 5.5%-7.5% cap; longer leases; strong tenant demand in logistics hubs. Cash-on-cash often 7%-10% after reasonable leverage.
- Multifamily: 5%-7% cap (varies with rent control, taxes, insurance). 6%-10% cash-on-cash if taxes and insurance don’t bite.
- Neighborhood Retail/NNN: 6%-8% cap; tenant credit matters. Single-tenant NNN can trade tighter with corporate guarantees.
- Office: 7%-10%+ cap; high leasing risk. Underwrite big TI/LC reserves and longer downtime.
- Self-Storage: 6%-8% cap; sensitive to new supply but operationally resilient.
- Hospitality: 7%-10%+ cap; returns swing with RevPAR and management quality.
By risk style: core targets lower IRR with steady yield; core-plus adds light value levers; value-add needs a clear NOI growth plan; opportunistic depends on development, heavy repositioning, or distress.
Quick comparison by property type
| Asset Type | Typical Cap Rate | Stabilized CoC | Lease Length | Volatility | Notes |
|---|---|---|---|---|---|
| Industrial | 5.5%-7.5% | 7%-10% | 3-10 years | Low-Medium | Strong demand in logistics markets; watch replacement supply. |
| Multifamily | 5%-7% | 6%-10% | 12-month leases | Medium | Expense pressure (taxes/insurance); fast mark-to-market. |
| Neighborhood Retail | 6%-8% | 7%-11% | 3-10 years | Medium | Tenant mix and anchors drive traffic; CAM recoveries matter. |
| Office | 7%-10%+ | 8%-12%+ | 3-10 years | High | Big TI/LC and downtime; demand bifurcated by quality. |
| Self-Storage | 6%-8% | 7%-11% | Monthly | Medium | Revenue management is key; watch over-building. |
| Hospitality | 7%-10%+ | 8%-14%+ | Daily | High | Highly cyclical; management intensity drives outcomes. |
The financing lens: why the spread makes or breaks the deal
Debt service coverage ratio (DSCR) - NOI divided by annual debt service. Lenders typically want ≥1.20x-1.30x in 2025; higher for riskier assets. DSCR controls loan proceeds when rates are high.
Loan-to-value (LTV) - loan balance divided by property value. Typical ranges: 55%-70% in 2025 depending on asset, DSCR, and sponsor strength. Lower LTV improves DSCR and resilience but lowers cash-on-cash.
Targets that feel good on paper fall apart if the interest rate eats the spread. A healthy rule of thumb: aim for a 1.5%-3.0% cap rate spread over your all-in interest rate. If your fixed rate is 6.5%, a 7.5% cap is thin; you’ll need strong rent growth or expense recoveries to justify it.
Example: Purchase at $2,000,000, NOI $130,000 (6.5% cap). 65% LTV loan at 6.75%, 25-year amortization implies roughly $112,000 annual debt service (estimate). DSCR ≈ 1.16x-tight. Equity ≈ $700,000; if cash flow after debt is $18,000, that’s ~2.6% cash-on-cash. Not great unless you have a clear, near-term plan to lift NOI.
Same asset post-execution: lift NOI to $170,000 (by filling vacancy and modest rent bumps). Now value ≈ $170,000 / 6.5% = $2.615M. With similar debt terms, DSCR ≈ 1.52x and cash-on-cash jumps into high single digits. Your IRR rises with both cash flow and value creation.
Lease structure shapes the “good” in your return
Triple-net lease (NNN) - tenant pays taxes, insurance, and maintenance. Attributes: predictable landlord cash flow, lower expense risk, often lower cap rates, heavy reliance on tenant credit and lease duration.
Under a NNN lease, the line between NOI and rent is thin-fewer surprises. Under gross or modified gross, the landlord absorbs more expense volatility. If insurance and taxes are spiking in your market, favor NNN or strong expense recoveries.
How to judge if your deal is “good”
- Cap rate spread: target ≥ 150-300 bps over your all-in interest rate.
- DSCR: ≥ 1.25x on in-place NOI; ≥ 1.35x on year-one pro forma if any lease-up risk.
- Cash-on-cash: stabilized 6%-12% depending on leverage; value-add should show a clear path beyond 10%.
- IRR: 12%-16% core-plus, 15%-20% value-add, 20%+ opportunistic-but only if assumptions are realistic.
- Break-even occupancy: know the occupancy at which DSCR hits 1.0x; avoid deals that fail with a small vacancy.
- Reserves: budget TIs/LCs, CapEx, and a rainy-day fund; unfunded obligations wreck returns.
Worked example you can copy
Scenario: 25,000-sf Class B industrial in a secondary submarket. Price $3,250,000. In-place rent roll at market with 18 months average remaining term. Expenses partly reimbursed. In-place NOI $211,250 (6.5% cap).
- Debt quote: 65% LTV; fixed 6.85%; 25-year amortization; DSCR minimum 1.25x. Annual debt service ≈ $240,000.
- Day-1 DSCR = $211,250 / $240,000 ≈ 0.88x. Proceeds will be DSCR-limited. Lender cuts loan to hit 1.25x: Max debt ≈ NOI / (Debt constant). Debt constant at 6.85%/25yr ≈ 8.4%. Max loan ≈ $211,250 / 0.084 ≈ $2.52M → 77% LTV? Not allowed; lender caps at 65% LTV ($2.11M). DSCR at 65% debt: recompute with payment ≈ $177,000 → DSCR ≈ 1.19x. Still tight; lender may reduce proceeds slightly more.
- Equity: ≈ $1.2M. Cash flow after debt ≈ $34,000 → cash-on-cash ≈ 2.8%. Not attractive without upside.
- Plan: convert two month-to-month bays to 3-year leases with 3% bumps; push rents 7% to market; install LED package (utility savings); negotiate full NNN reimbursements. Target NOI in 18 months: $260,000.
- Recheck: DSCR at $260,000 NOI vs $177,000 debt ≈ 1.47x; cash-on-cash ≈ $83,000 / $1.2M ≈ 6.9% (after reserves). At exit cap 6.75%, value ≈ $3.85M. 3-year levered IRR pencils near mid-teens with modest exit assumptions.
Lesson: a “bad” day-one cash yield can become “good” if you control a short, believable path to higher NOI. If you can’t define that path, pass.
What moves returns the most
- Rent roll quality: credit, lease term, rent escalations, renewal probability.
- Expense recoveries: NNN beats gross when taxes/insurance are volatile.
- Supply/demand: new deliveries crush rents; barriers to entry protect them.
- Interest rate path: floating-rate debt magnifies both pain and upside.
- Tax/insurance trends: in some states, these two line items decide your fate.
- CapEx and downtime: TI/LC in office/retail can erase a year of cash flow fast.
Data sources you can trust
For context and sanity checks, lean on primary sources: the CBRE Cap Rate Survey (mid-2025), PwC/ULI Emerging Trends in Real Estate 2025, and the NCREIF Property Index for total return benchmarks. For rate context, use Federal Reserve data (FRED). For comps, pull broker opinion letters and subscription data services like CoStar. Use these as guardrails, but underwrite to your property’s rent roll and local laws.
Related concepts (worth bookmarking)
Core, Core-Plus, Value-Add, Opportunistic - risk styles in commercial real estate that target rising returns alongside rising execution and capital risk.
Debt yield - NOI divided by loan amount; a lender metric of collateral cash power. Many lenders look for 8%-10%+ in 2025 depending on asset and market.
Break-even occupancy - the occupancy rate at which NOI equals debt service; lower is safer. Calculate with conservative rents and realistic expenses.
Cheat sheet: quick rules and pitfalls
- Rule: Don’t buy sub-1.20x DSCR on in-place NOI unless you have locked-in lease-up and ample cash reserves.
- Rule: Prefer leases with 3%+ annual bumps or CPI-linked escalations.
- Rule: Model reversion at a higher exit cap (add 25-100 bps) to reflect rate risk.
- Rule: Underwrite lender fees, prepay costs, and refi risk; IO periods end.
- Pitfall: Using pro forma reimbursements that the leases don’t actually allow.
- Pitfall: Underestimating property taxes post-purchase; confirm reassessment triggers.
- Pitfall: Ignoring roof/HVAC age and replacement reserves; they hit cash yield.
Next steps and simple troubleshooting
- Build a one-page underwriting: price, NOI, cap rate, debt terms, DSCR, CoC, exit cap. If any number looks forced, pause.
- Stress test: +100 bps rate, −10% rents, +15% expenses. If DSCR stays ≥1.20x and CoC remains positive, you’re closer to “good.”
- Call two lenders first: let proceeds and covenants inform your max price.
- Validate with comps: broker cap rate anecdotes, recent sales, and rent comps within the last 6-12 months.
- Document your NOI growth story: who, how, when, and with what budget.
Key definitions, at a glance
Cap rate vs. IRR - Cap rate is a snapshot unlevered yield; IRR is a time-weighted levered total return. Cap rate helps you price today; IRR helps you judge the journey.
Stabilized return - the expected cash-on-cash once leases are in place and operations settle, usually 6-24 months after acquisition for value-add.
Frequently Asked Questions
What is a good cap rate for commercial property in 2025?
For stabilized assets in healthy U.S. markets, industrial often trades around 5.5%-7.5%, multifamily 5%-7%, retail 6%-8%, self-storage 6%-8%, hospitality 7%-10%+, and office 7%-10%+. Good depends on your debt rate and risk; aim for at least a 1.5%-3.0% spread over your all-in interest rate so cash flow remains strong after financing.
What is a good cash-on-cash return for commercial real estate?
Stabilized 6%-12% is common in 2025. Lower leverage, fixed-rate debt, and strong leases often land in the mid-to-high single digits. Value-add deals may start near 0%-5% and ramp above 10% when the business plan hits. Always compute cash-on-cash after setting aside reserves for CapEx and leasing costs.
What IRR should I target on a 5-10 year hold?
Core-plus sponsors often target 12%-16% levered IRR, value-add 15%-20%, and opportunistic 20%+. Those are ranges, not promises. The real test is whether your plan relies on aggressive rent growth or cap rate compression. Underwrite a modest exit cap expansion (25-100 bps) to keep projections honest.
How do interest rates change what’s considered good?
Higher rates raise the bar. Lenders demand stronger DSCR and lower LTV. Cap rates typically drift up, and cash-on-cash compresses unless prices adjust. A “good” return today often means a bigger cap rate spread, fixed-rate or hedged debt, and conservative exit assumptions to absorb rate risk at refinance or sale.
Is a higher cap rate always better?
No. High cap rates can signal higher risk: weak tenants, big CapEx needs, questionable locations, or short leases. You want yield that is durable. A slightly lower cap with long, NNN credit leases may beat a high cap that evaporates when a tenant leaves or taxes spike.
What DSCR should I require before buying?
Aim for ≥1.25x on in-place NOI and ≥1.35x on year-one if you have any lease-up or rollover risk. For office or hotels, push even higher. DSCR is your first safety buffer; it protects cash flow even if rents soften or expenses jump.
How do I compare NNN to gross-leased assets?
NNN shifts taxes, insurance, and maintenance to tenants, so landlord cash flow is cleaner and more predictable; cap rates are usually lower. Gross or modified gross may show higher cap rates, but expense volatility is on you. Normalize to true NOI under each lease form and compare DSCR and cash-on-cash apples-to-apples.
Which sources can I use to benchmark my market?
Use the CBRE Cap Rate Survey (2025), PwC/ULI Emerging Trends, and the NCREIF Property Index for return context. For rates, check FRED. For sales and rents, pull CoStar and local broker sales comps. Then adjust for your submarket’s taxes, insurance, and supply pipeline.
Commercial property underwriting - the process of forecasting revenue, expenses, capital needs, and financing to test DSCR, cash-on-cash, and IRR under base and stress scenarios.
Sensitivity analysis - testing how returns change when key inputs move: rates up 100 bps, rents down 10%, expenses up 15%, or exit cap +50 bps.
Equity multiple - total dollars returned divided by total equity invested. A 2.0x multiple means you doubled your money over the hold, regardless of timing.
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