Why is minimum cap rate 10 year treasury plus the spread?
10 year treasury is currently 0.69^(1)

What is the spread between? How is it calculated?

&amp;#x200B;

1 [https://fred.stlouisfed.org/series/T10Y2Y](https://fred.stlouisfed.org/series/T10Y2Y)
[{"id": "gaksnsi", "text": "US Treasury is a \u201crisk-free\u201d investment so you would expect some spread between the 10Y Treasury Rate and Cap Rates to account for the risk in investing in a management intensive asset like CRE.", "replies": [{"id": "galtk8r", "text": "This is the textbook answer. The spread between risk free rate and cap rate will be a function of the type of property, the location, the age and condition, and tenant quality. \n\nFor type of property, for example, you might say that industrial assets are low risk right now and justify a 25 bp spread over the risk free rate (I would then go through the exercise and make adjustments for asset location, age, condition, and tenant quality).", "replies": [{"id": "gamnria", "text": "You must be an industrial broker or seller to say industrial cap rates should be 25bps above 10YT lol", "replies": [{"id": "gamukgs", "text": "In his/her defense, solid industrial property is universally loved by lenders (with the exception of Freddie Mac or whatever) and yields great rates/strong appraisals/etc.", "replies": [{"id": "gan3ll6", "text": "Agreed but even Amazon leased buildings with strong lease terms and escalations are still trading at 4% caps. That\u2019s ~325 bps over 10YT. Rare you see any stabilized real estate much below that which is reasonable when you consider relative illiquidity. I\u2019m nitpicking, I know.", "replies": [], "depth": 5}], "depth": 4}, {"id": "gan8zwu", "text": "That is just one adjustment I would make. I didn\u2019t spend the time making all risk adjustments. If you re-read my comment, I said \u201cI would then go through the exercise and make adjustments for asset location, age, condition, and tenant quality\u201d meaning I\u2019d add to the spread based on each of those conditions. I just made the \u201casset type\u201d adjustment for the sake of providing an example. \n\nSorry if that was not clear. I definitely did not mean to imply that industrial cap rates should be that low. That would be ridiculous. \n\nI would also verify my assumptions by comparing my cap rate to market reports.", "replies": [{"id": "gazkcao", "text": "This approach makes sense. However, I am wondering how you choose the spread for different adjustments you make? I have market cap rates by asset type, so could cross check to validate the calc. cap rates obtained.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "gamw4t7", "text": "So, the cap rate for industrial assets is 0.69 (10Yr) + 0.25 (Spread) = 0.94? I might be missing something here, but that seems super low.", "replies": [{"id": "gamw5wg", "text": "Nice\n\nI'm a bot. Join my community at r/nicebot2 - [Leaderboard](https://redd.it/jdj6xc) - [Opt-out](https://redd.it/jdrs8u)", "replies": [{"id": "gamw7ed", "text": "Here's a sneak peek of /r/nicebot2 using the [top posts](https://np.reddit.com/r/nicebot2/top/?sort=top&amp;t=all) of all time!\n\n\\#1: [\u201cW-WHA?! 69? A NUMBER.... THATS FUNNY?!?!?! HUMMINA HUMMINA BAZOING!! S*X NUMBER! 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At the end of my comment, I said \u201cI would then go through the exercise and make adjustments for asset location, age, condition, and tenant quality\u201d\n\nYou could do something like this:\n\nStart with Risk free rate, then adjust for:\n\nAsset type + 25-500bps\n\nAsset location + 25-500bps\n\nAsset age + 25-500bps\n\nAsset condition + 25-500bps\n\nTenant quality + 25-500bps\n\nThe ranges for each adjustment could vary too. This is just one way you could \u201cquantify\u201d it. I\u2019d also recommend comparing your assumptions to market area cap rates.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gf9dnmi", "text": "For Market conditions, it seems a bit counter intuitive to me that cap rates are lower with rental growth. i.e In a market with strong demand, high rental growth, low vacancy, the NOI on rental property is high. \n\nWouldn't that mean a higher cap rate? NOI of 50,000 on 1m = 5% vs 60,000 on 1m = 6%.  I assume the low cap rates indicate lower risk premium due to strong market, however, what economic signal captures this in the construction of cap rates?", "replies": [{"id": "gfb2tju", "text": "If the NOI increases from 50,000 to 60,000, and cap rate stays the same, the value of the asset would increase, from $1m to $1.2m. In a strong market with high rent growth, strong asset class, quality tenants, etc, the cap rate is not going to increase along with rent growth - it would stay the same, if not decrease (thereby increasing value). \n\nMaybe you bought the asset for $1m, with a 50,000 NOI, but that is no longer relevant to the value if NOI or cap rates change. You would look at your assets market value at that point. Is that what you\u2019re getting at?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gamuil9", "text": "In his/her defense, solid industrial property is universally loved by lenders (with the exception of Freddie Mac or whatever) and yields great rates/strong appraisals/etc.", "replies": [], "depth": 1}]