Cap Rates in Secondary U.S. Markets: What to Watch

Is a higher cap rate in a smaller city a bargain or a red flag? If you are eyeing income property outside the big gateways, you want clarity on what the yield really says about risk and future value. We get how noisy the market feels after the last few years. In this guide, you will learn how cap rates in secondary U.S. markets behave, what moved them since 2022, and a simple checklist to judge whether pricing makes sense for your deal. Let’s dive in.

Cap rates in plain English

A cap rate is the stabilized net operating income divided by the purchase price. It is a snapshot of the unlevered return the market requires for that property’s risk. Financing and future growth sit outside this number, which is why you should pair cap rates with a view on NOI growth and exit liquidity.

Markets fall into primary, secondary, and tertiary tiers. Secondary markets are mid-sized metros with solid fundamentals and lower liquidity than gateways. Definitions vary by firm, and that is why you should rely on local comps rather than a single national rule of thumb. For context on how firms frame tiers, see CBRE’s discussion of market classification and liquidity in its research library.

What changed since 2022

Interest rates jumped in 2022 and 2023, which pushed cap rates higher as buyers demanded more yield. That repricing showed up across asset types and metros, although the magnitude varied by sector and market quality. You can see the mechanics in recent cap-rate shock analysis that quantifies how even a 50 bp rate move can reset values (cap-rate shock research).

By early to mid 2025, parts of the market began to stabilize. Core multifamily saw modest cap-rate compression as participants priced in slower or eventual Fed easing and better fundamentals, according to CBRE’s Q1 2025 multifamily survey. The pace of change still depends on asset quality, location, and financing access.

Why secondary markets behave differently

Demand and migration

Population and job growth support rent, occupancy, and NOI growth, which can justify tighter cap rates. The U.S. Census Bureau’s Vintage 2024 estimates show notable gains across many Sun Belt and mid-sized metros. Track local demand because it drives both today’s income and tomorrow’s value.

Supply and the pipeline

Secondary markets can see fast rent gains early in a cycle when supply is small, then temporary pressure when new deliveries hit. Watch unit counts under construction and scheduled deliveries, since near-term supply affects vacancy and pricing. Company filings and industry reports frequently flag markets with outsized new construction activity.

Capital flows and liquidity

When investors chase yield outside gateways, spreads between primary and secondary markets can tighten. This is especially true when institutional and national private buyers become active, as noted in reporting on competition pushing investors into tertiary markets. Liquidity matters because it affects both entry pricing and exit options.

Property type differences

The same metro can price very differently by sector. Industrial in a logistics hub may trade at low cap rates if demand is strong, which recent industrial market deep dives highlight. Specialty assets like data centers often reflect record demand and tight vacancies, with investment flowing to secondary locations that have available power, per CBRE’s data center trends.

Local risk factors

Taxes, insurance costs, climate exposure, and tenant concentration can raise required yields. In smaller, less liquid markets, a single employer or industry mix can also influence cap rates. Treat these as underwriting items that change the yield you need to be paid.

What to watch in a secondary market

Use this checklist to judge whether a quoted cap rate is reasonable for the risk:

• NOI trend. Look at trailing 12-month NOI and 3-year growth. Rising NOI supports tighter cap rates. Flat or falling NOI argues for a premium.
• Rent and vacancy by submarket. Track effective rent changes and occupancy by product class. Local reports from major research shops can help you benchmark.
• Net absorption and deliveries. New supply can pressure rents. Pair leasing demand with the pipeline to gauge near-term risk.
• Employment and population. Diversified job bases reduce single-employer risk and support demand. The Census Bureau’s population estimates provide a clear migration backdrop.
• Recent comparable sales and liquidity. Sales volume and verified cap rates from reliable databases signal real pricing and depth. Thin volume means higher execution risk even when headline cap rates look attractive.
• Spread to risk-free rates. Compare the local cap rate to the 10-year Treasury. Some multifamily data in 2023 and 2024 showed spreads near roughly 120 bps, which is tighter than long-run norms and raises rate sensitivity. See this multifamily outlook summary with cap-rate spreads.
• Debt availability. Agency programs remain central to multifamily lending, and lender appetite influences pricing and certainty of close. Review Freddie Mac filings for signals on credit standards and volumes.

Simple value sensitivity to run

Reprice your deal using a 50 to 100 bp change in cap rate and hold NOI constant. A 100 bp increase can imply a double-digit percentage value decline, which is why entry cap rate and exit liquidity matter. For context on how rate changes ripple through value, see recent cap-rate shock research.

Quick sector notes

• Industrial and logistics. Strong demand and limited modern supply kept yields relatively low in many hubs. Select secondary logistics markets trade tighter than you might expect.
• Multifamily. Core deals in healthy secondaries often show tight cap rates, while value-add pricing is wider to reflect execution risk. CBRE’s recent survey points to modest compression for core assets as sentiment improved.
• Office. Divergence remains high. Vacancy and lease-up risk push cap rates wider in many secondary locations.
• Retail and single-tenant net lease. Long-term, credit-anchored cash flows support stable pricing.
• Specialty. Data centers show localized strength, while operations-heavy assets like seniors housing can be more variable by market.

For homeowners and sellers

Cap rates apply to income property, not to owner-occupied single-family homes. Your home’s pricing reflects mortgage rates, local supply, and buyer demand rather than an NOI-based yield. If you are selling a rental or an asset with income, cap rate and NOI analysis will matter to your buyer pool.

How to use this on your next deal

• Start with local demand. Pull population and job trends, then check effective rents and vacancy for your submarket.
• Map the pipeline. Look at deliveries in the next 12 to 24 months and compare to recent absorption.
• Validate comps. Collect verified sales with in-place NOI and trade cap rates. Confirm buyer type and deal terms.
• Underwrite financing. Get real quotes on proceeds and rate. Note agency or balance-sheet appetite for the asset type.
• Test the spread. Compare your going-in cap rate to the 10-year Treasury. Know how much cushion you have and how a 50 to 100 bp move would affect value.
• Plan the exit. In secondary markets, exit liquidity is part of the return. Identify the likely buyer and financing path on the way out.

When you want a calm, data-forward read on a specific property, our team is here to help you weigh yield, risk, and exit with confidence. Reach out to Sanctuary Real Estate for a focused consultation on your next purchase or sale.

FAQs

What is a cap rate in secondary markets and why it matters

• A cap rate is NOI divided by price, and in secondary markets it reflects both income yield and a premium for local liquidity and operational risk.

How did 2022 to 2025 rate shifts change cap rates in smaller metros

• Rapid rate hikes pushed cap rates up, then parts of the market stabilized with modest compression for core multifamily as sentiment improved, per CBRE’s Q1 2025 survey.

Are higher cap rates in secondary cities automatically better for investors

• Not automatically, because higher cap rates often compensate for risk; you should judge NOI growth, liquidity, and financing to see if the premium is sufficient.

What is a practical benchmark for cap-rate spreads to the 10-year Treasury

• Recent multifamily data showed spreads near roughly 120 bps in 2023 to 2024 in some series, which is tight versus history and raises interest-rate sensitivity.

What simple stress test should I run before I buy an income property

• Reprice the asset with a 50 to 100 bp cap-rate change while keeping NOI flat to see the value impact and test your refinance or exit risk.