NNN cap rates are the most heavily-watched metric in commercial real estate. Because NNN income is bond-like, NNN cap rates trade in tight bands tied to credit, term, and location. Understanding how cap rates are set lets you identify good buys, walk from bad ones, and negotiate effectively.

This lesson covers how NNN cap rates are determined, the factors that drive premiums and discounts, and how to price a deal from start to finish.

The cap rate formula refresher

Cap rate = NOI / Property value (or purchase price)

For NNN, the NOI is straightforward — it's the contracted rent. There's no expense leakage to estimate because the tenant pays all expenses.

A property generating $200K/year of rent at a 5.5% cap rate is worth:

Value = NOI / Cap rate = $200K / 0.055 = $3,636,000

Lower cap rate = higher price. Higher cap rate = lower price. The cap rate is essentially the "yield" on the unlevered investment.

What drives NNN cap rates

1. Tenant credit

The most important factor. Investment grade tenants trade 75-150 bps lower than non-rated tenants. We covered this in Lesson 3.

2. Remaining lease term

Longer remaining term = lower cap rate.

Approximate adjustment per year of term:

20+ years remaining: best pricing (5.5-6.0% for IG tenants)
15-20 years: -25 bps from peak
10-15 years: -50-75 bps from peak (cap rates rise)
5-10 years: -100-150 bps from peak (re-leasing risk priced in)
Under 5 years: -200+ bps (expensive — buyer faces near-term re-leasing)

A Walgreens with 18 years remaining might trade at 5.5% cap. The same Walgreens with 4 years remaining might trade at 7.5% cap. The difference is the discount for re-leasing risk.

3. Lease structure

Absolute NNN: best pricing
NNN with landlord roof and structure: 25-50 bps wider
NN: 50-100 bps wider
Modified gross: 100-200 bps wider

The more responsibility on the landlord, the higher the cap rate.

4. Location quality

Primary market, prime corner: best pricing
Primary market, secondary location: 25-50 bps wider
Secondary market: 50-100 bps wider
Tertiary market: 100-200 bps wider
Rural / remote: 200+ bps wider

Location quality matters because if the tenant ever leaves, you need to be able to re-lease the space. Better locations have more potential tenants.

5. Property type

Different property types trade at different ranges:

Drug stores (Walgreens, CVS): 5.5-6.5%
Dollar stores (Dollar General, Dollar Tree): 6.0-7.0%
QSR (McDonald's, Starbucks): 5.0-6.5%
Auto parts (AutoZone, O'Reilly): 6.0-7.0%
Banks: 5.0-6.5%
Convenience stores (7-Eleven, Wawa): 5.5-7.0%
Industrial / distribution: 5.5-7.5%
Medical (urgent care, dialysis): 6.0-7.5%
Daycare (KinderCare, Goddard): 6.5-8.0%
Car wash: 6.5-8.0%

These ranges shift with the market. Always check current comps.

6. Property age and condition

Newer construction trades at lower cap rates than older. A 5-year-old Walgreens trades better than a 25-year-old Walgreens with similar remaining lease term.

7. Real estate fundamentals

Beyond the lease, the underlying real estate matters:

Land value (high land value = lower cap because of intrinsic real estate value)
Building reuse potential (specialty buildings = wider cap)
Demolition cost (if the building is a teardown, it's a land deal at a different cap)
Zoning and development potential

A 25-year-old Walgreens on a high-traffic corner with strong demographics has real estate value beyond the lease. An identical Walgreens in a declining rural area is just the lease value.

8. Interest rate environment

NNN cap rates correlate strongly with long-term interest rates. When the 10-year Treasury rises, NNN cap rates eventually rise too.

Approximate relationship: NNN cap = 10-year Treasury + 100-300 bps spread (depending on credit and risk).

When 10-year Treasury was 1.5% in 2020, IG NNN traded at 4.5-5.0%. When it rose to 4.5% in 2024, IG NNN moved to 5.5-6.5%.

This is why NNN buyers obsess over Fed policy — interest rate moves directly affect their valuations.

9. Buyer pool depth

NNN deals trade primarily to:

1031 exchange buyers
Retired investors seeking income
Family offices
Small institutional buyers
DST sponsors

When the 1031 buyer pool is strong (lots of capital chasing few deals), cap rates compress. When the pool is weak (limited buyers), cap rates expand.

This is why NNN markets have cycles. Track the buyer pool, not just the listing volume.

Pricing a specific deal — worked example

You're considering a Dollar General NNN in Polk County, FL. Here's how to price it.

Property facts

Tenant: Dollar General Corporation (corporate guaranteed)
Credit: BBB+ (S&P)
Lease: NNN with absolute net structure
Original term: 15 years
Remaining primary term: 11 years
Options: 4 × 5 years
Annual rent: $115,000 (flat for the primary term)
Step-ups in options: 10% increase at each option
Building: 9,100 SF, built 2018, freestanding
Location: Highway location in growing rural area
Land: 1.2 acres
Ask price: $1,800,000 (6.4% cap)

Cap rate analysis

What should this deal trade at?

Tenant: Dollar General BBB+ → IG, near top of NNN credit Term: 11 years remaining → solid but not premium Lease: Absolute NNN → best lease structure Location: Highway, growing rural → average to slightly above average Building: 6 years old, modern → good Comp adjustment: Dollar General properties typically trade 6.0-7.0%

Where in the range?

11 years remaining (vs 15+ peak): -25 bps adjustment
Above-average location: 0 bps
Solid tenant with clean lease: peak credit
New building: peak

Estimated fair cap rate: 6.25-6.5%

At 6.25% cap: $115K / 0.0625 = $1,840,000 At 6.5% cap: $115K / 0.065 = $1,769,000

Fair value range: $1,769K - $1,840K

The asking price of $1,800,000 is right in the middle. This is a market deal — not a screaming buy, not a ripoff.

Negotiation approach

If you want this deal, you'd offer somewhere in the $1.72M-$1.78M range and expect to settle around $1.78M-$1.80M.

If you can find a deal below $1.72M, that would be a strong buy at 6.7%+ cap.

Sensitivity analysis

What if rates rise during your hold?

If 10-year Treasury rises 100 bps over 5 years, NNN cap rates likely rise 50-100 bps. At 7.0% exit cap on $115K rent (assuming flat), exit value = $1,643K. You'd lose money on a sale.

But: you'd still collect $115K × 5 = $575K of rent during the hold. So your total return depends on whether you exit at the lower value or hold longer.

NNN deals are most vulnerable to rising rates during the hold period. Build this into your underwriting.

Looking at comps

Cap rates are not arbitrary — they're set by recent comparable sales. To price a deal accurately, you need recent comps.

Sources of NNN comps

CoStar — paid subscription, gold standard for verified sales
CrediFi / Reonomy — paid alternatives
Free public records — county property appraiser sites show recent sales but limited details
Broker comp packages — listing brokers provide comps to support listings (biased but useful)
Net lease specialty brokerages — Boulder Group, Marcus & Millichap, Stan Johnson, NNN Pro Group publish quarterly cap rate reports
Net Lease Cap Rate Reports — quarterly published by major brokerages, freely available online

How to use comps

For each comp:

Verify the tenant
Verify the lease term remaining at the time of sale
Verify the lease structure
Compare property quality
Adjust for time (cap rates may have moved since)

A comp from 18 months ago needs adjustment if rates have moved since. A comp from 6 months ago is closer to current.

What "good comps" look like

Same tenant or closely comparable credit
Same property type
Similar lease term (within 2-3 years)
Same market or nearby market
Recent transaction (within 6-12 months)
Verified by reliable source

Beware of "asking" cap rates

Asking cap rates on listings are not actual transaction cap rates. Listings often hang around for months because they're priced too aggressively. Use closed sales, not active listings.

When the cap rate doesn't match the lease

If you find a NNN property with a cap rate that seems out of line with the lease quality, dig deeper. There's usually a reason.

Possible reasons for "above market" cap rate (cheaper than expected):

Hidden lease issues — termination right, FMV renewal, vague maintenance language
Tenant deterioration — credit weakening, sales declining, rumored closures
Property issues — environmental, structural, zoning problems
Location decline — demographics, traffic, competition shifts
Sale structure — assumable loan, special tax considerations
Seller motivation — distressed seller, urgent timeline, unsophisticated seller

Investigate before assuming you've found a steal. The market is generally efficient on NNN — large discounts usually have causes.

Possible reasons for "below market" cap rate (more expensive than expected):

Recent lease extension — adds value above the basic lease
Strong escalations — built-in rent growth supports lower cap
Premium location — irreplaceable corner
Tenant strength upgrade — recent rating improvement
Special market dynamics — local 1031 exchange buyer pool
Unique property — limited supply of similar assets

Actually closing the gap on price

When negotiating a NNN purchase, the cap rate is the lever:

"We're at a 6.0% cap rate based on $200K NOI; comps support 6.25%, so our offer is at $3.2M instead of your $3.33M ask"
"Your asking cap of 5.75% is below recent Walgreens transactions at 6.0-6.25%; we can do $3.2M at 6.25% cap"

Cap rates make the math objective. You can negotiate from market data, not opinion.

When a deal makes sense

A NNN deal makes sense when:

The cap rate is at or above recent comparable transactions
The tenant credit is strong enough for your risk tolerance
The lease term is long enough to support your hold period
The lease structure is genuinely passive (read carefully)
The location is leasable to alternative tenants if needed
The all-in cost (including closing) supports your return target

If any of these fail, walk. NNN is a market with abundant deals — there's always another one tomorrow.

What to take away

NNN cap rates are driven by tenant credit, lease term, structure, location, property type, and market conditions
Investment grade tenants trade 75-150 bps lower than non-rated
Longer remaining lease term = lower cap rate (more valuable)
Absolute NNN is the gold standard; modified structures trade wider
Property type creates pricing bands you can use as benchmarks
NNN cap rates correlate with the 10-year Treasury — track interest rates
Use recent verified transaction comps, not asking prices
If a cap rate seems out of line with the lease, dig deeper — there's usually a reason
Negotiate from market data: cap rate comps make the math objective
Walk from deals that don't fit your criteria — there are always more NNN deals tomorrow

Next lesson: the best NNN tenants and brands for income investors — who to look for, who to avoid, and how to think about tenant selection.

Cap Rates and Pricing NNN Deals