Cap rate spread refers to the difference between a property's capitalization rate and a benchmark risk-free rate, most commonly the yield on the 10-year Treasury note. Investors use this spread as a rough gauge of the risk premium real estate offers over a virtually riskless government bond, since a wider spread suggests investors are being compensated more generously for taking on illiquidity, vacancy, and market risk.
Spreads compress when property values rise faster than Treasury yields and widen when the opposite occurs, which is part of why cap rates do not always track interest rates in lockstep. A detailed look at the relationship between interest rates and cap rates shows that supply and demand for capital, lending conditions, and investor sentiment all factor into where spreads settle at any given point in the cycle.
Further reading: Do Interest Rates Really Drive Cap Rates? What Investors Need to Know
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