Encyclopedia
Capitalisation rate (cap rate) spread
The difference between a property's cap rate and a benchmark interest rate, such as a government bond yield. It's one way buyers judge whether a price makes sense given borrowing costs.
For example: A buyer compares a building's cap rate with current mortgage rates and sees that the spread is thin, which means leverage won't help much. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say cap rates on industrial buildings are only a little above the rate on government bonds. That narrow spread suggests investors are accepting less extra return for property risk. You factor that into your view of pricing.
What I’d tell a friend
Compare cap rates with borrowing and bond rates to judge whether pricing makes sense.
Why it matters to you
It's the gap between what a property earns and what your money could earn elsewhere, or what it costs to borrow. When it narrows, owning property gets less attractive and leverage can work against you.
How to use it in your deal
Buyers can compare the spread with past levels to judge whether pricing looks rich or cheap, then look at financing: if the spread is thin, borrowing may not add much return and could even reduce it. Sellers should understand why buyers are asking for higher cap rates when rates rise. Lenders watch spreads when setting terms.
Owners holding long term may ride out short changes, but if you're refinancing in a year when the spread is thin, expect the lender to size the loan more cautiously. Tenants don't price buildings, yet they feel this indirectly: when spreads are tight, landlords push harder on rent and recoveries to make the numbers work.
A practical check before an offer on, say, a small Surrey retail building: write down the cap rate, the current five-year yield and your mortgage rate side by side. If the mortgage rate is above the cap rate, every borrowed dollar lowers your cash return, and you're betting on rent growth or value growth to make up for it.
Mistakes I see
Ignoring the spread when rates move. Using different benchmarks. Forgetting property risk differs.
In BC and Vancouver
The Bank of Canada publishes bond yields. Cap rates come from industry sources.
Official sources: Bank of Canada: key interest rates · Canada Mortgage and Housing Corporation
What it means
A cap rate spread is the gap between cap rates and a benchmark, such as government bond yields or mortgage rates.
A wider spread means more extra return for taking on property risk.
Using it
Watch how spreads change over time and by property type.
A narrow spread can signal less room if rates rise, so test your numbers with a higher exit cap rate. I can share recent market data with you.
Questions to ask before you sign
- What's the current bond yield?
- What's the property's cap rate?
- How does the spread compare to history?
- Does borrowing still help?
Keep reading
Related terms: Cap rate, Leverage (negative), Yield (5-yr GoC)
Working through this right now? Questions are free. Book a 15-minute call or call or text 604 256 2002, and I’ll give you a straight answer.
Back to the A–Z index · common questions · tactics to watch for · the shorter glossary
General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.