How to Underwrite an Industrial / Warehouse Deal

Overview

Industrial is a leased-asset class, and the value sits in the leases and in the building's functionality. That makes it a different exercise from multifamily. Instead of hundreds of month-to-month residential leases that average out, an industrial asset might have a single tenant on a fifteen-year net lease, or a handful of tenants each on a multi-year lease with its own rent schedule, reimbursement structure, and renewal options. The underwriting is lease abstraction plus a view on what happens when those leases roll.

The building either works for a modern occupier or it does not. Clear height, dock-door count, truck court depth, and power decide whether a departing tenant can be replaced at market rent or only at a discount. That is functional obsolescence, and it is the industrial equivalent of a bad floor plan you cannot renovate away. A 20-foot-clear, shallow-bay building in a market that leases 32-foot-clear bulk distribution space will re-tenant slowly and cheaply no matter what the current rent roll says.

The workflow below follows the order an acquisitions analyst actually works: assess the building, abstract the leases, model the reimbursements, underwrite the rollover, then pressure-test the exit. Lease abstraction makes industrial time-consuming by hand, often 8 to 14 hours for a first-pass model on a multi-tenant asset. AI-assisted lease abstraction compresses that, but the judgment on credit, rollover, and functionality is still yours.

Step 1: Read the OM and Assess the Building

The OM is the seller's narrative, and the broker's headline is almost always a "mark-to-market" story: in-place rents are below market, so the buyer captures the upside on rollover. That may be true. Your job is to verify it and to check whether the building can actually re-tenant at the market rent the broker is quoting.

Start with the physical asset, because a functional building and an obsolete one carry the same rent roll but very different exit risk. Work through a functionality checklist:

• Clear height: Older infill runs 18 to 24 feet. Modern bulk distribution wants 32 to 40 feet so tenants can rack vertically. Low clear height narrows the tenant pool.
• Loading: Dock-high door count relative to square footage, drive-in doors, and whether the door ratio suits distribution or only light manufacturing.
• Truck court and trailer parking: Modern logistics wants 130-foot-plus court depth and dedicated trailer stalls. Shallow courts cap the users who can operate there.
• Structure and systems: Column spacing, floor load, power (amps and whether it can be upgraded), and ESFR sprinkler. Note the office finish ratio, since too much office is a cost, not an amenity, for a warehouse user.

Then pull the submarket picture: vacancy rate, recent net absorption, and the construction pipeline. Industrial saw heavy speculative development in several markets, and a wave of new deliveries pressures both market rent and lease-up timing on any space you have to backfill. A broker's rent growth assumption means little if 4 million square feet is delivering into your submarket over the hold.

Step 2: Abstract the Leases and Compute WALT

The rent roll is the starting point, but the lease abstract is the substance. In industrial, the leases are the asset. For each tenant, pull the terms that drive cash flow and risk:

1. Size and dates: Leased square feet, commencement, and expiration. This is what builds your rollover schedule.
2. Base rent and escalations: Current rent per square foot and the contractual bumps (flat dollar steps, fixed percentage, or CPI-linked). A 3 percent annual bump compounds meaningfully over a ten-year lease.
3. Reimbursement structure: NNN, modified gross, or full-service gross. This determines who pays operating expenses and is the subject of Step 3.
4. Options: Renewal options and their rent (fixed, market, or a floor), termination rights, expansion or right-of-first-refusal clauses, and any remaining free rent. A below-market fixed renewal option can cap your mark-to-market upside for years.

From the abstracts, compute WALT (weighted average lease term), the average remaining term weighted by square footage or by rent. WALT tells you how much of the income is contracted before you face releasing risk. A seven-year WALT single-tenant asset leased to an investment-grade tenant is close to a bond. A one-and-a-half-year WALT multi-tenant asset is a leasing play where your return depends on TI, leasing commissions, and downtime. State which weighting you used, because area-weighted and rent-weighted WALT can differ when a small tenant pays a high rate.

Credit-tenant analysis. A net lease is only as good as the tenant paying it. For the single tenant, or for any tenant that is a large share of the gross leasable area, assess credit: a public rating where one exists, private financials or a parent guaranty where it does not, and the strength of the operating business. A tenant occupying 60 percent of the building and rolling in year three with weak credit is not a footnote. It is the deal.

The abstract above is the skeleton of the model. Note how Tenant D expires first, is the smallest, and carries the highest rate and a gross lease, so it is both your nearest rollover and your biggest reimbursement modeling question. AcquiOS abstracts each lease from the PDF, pulling base rent, escalations, expirations, and reimbursement structure into a structured table, and validates the in-place rents against market comparables so you know which tenants are below or above market before you touch the rollover.

Step 3: Model the Expense Reimbursements

Reimbursements are where industrial underwriting gets technical, and where two deals with identical base rent can produce very different net income. The lease structure decides who pays operating expenses:

• Triple-net (NNN): The tenant reimburses its pro-rata share of property taxes, insurance, and common area maintenance (CAM). The landlord recovers most operating costs and mainly bears vacancy and non-recoverable capital. Most modern single-tenant and bulk distribution leases are NNN.
• Full-service gross: The tenant pays a flat rent and the landlord pays all operating expenses out of it. The landlord carries expense inflation and any vacancy leakage. More common on smaller flex and office-heavy space.
• Modified gross / base-year: The tenant pays increases over a base-year expense stop. Model the base year carefully, because the recovery only kicks in as expenses grow past that stop.

To model recovery income, build the recoverable expense pool, apply each tenant's pro-rata share, and then adjust for the terms in the abstract:

1. Separate recoverable from non-recoverable. Structural repairs, capital replacements, and sometimes the management fee are commonly excluded from CAM. What you cannot recover flows straight through to NOI.
2. Apply CAM caps. Many leases cap the annual increase in controllable CAM, often around 5 percent cumulative. Above the cap, the landlord eats the overage.
3. Handle gross-up. When the building is below full occupancy, gross-up provisions let you recover fixed expenses as if it were 95 percent leased, which protects recovery income during lease-up. Confirm each lease actually permits it.
4. Leak the vacant space. The landlord pays taxes, insurance, and CAM on any vacant square footage. Model that leakage explicitly rather than assuming a fully recovered building.

The output that matters is the recovery ratio: recovered expenses divided by total operating expenses. A well-leased NNN asset recovers 90 percent or more. A gross-leased or partly vacant building recovers far less, which shifts expense risk onto you. Reconcile your modeled recoveries against the actual reimbursement income on the T12 before you trust the number.

Step 4: Underwrite Rollover, TI, and Leasing Commissions

This is where industrial underwriting lives. Every lease eventually expires, and what you assume at each rollover drives the return far more than the in-place rent does. For each expiration, decide renew versus vacate, then model the cost of each path:

• Renewal probability: A reasonable base is 65 to 75 percent for a functional building in a healthy submarket, lower for obsolete space or a single-tenant asset where a departure means 100 percent vacancy.
• Downtime: Months of vacancy before you re-lease. Six to twelve months is common, longer for large blocks or weaker markets. Downtime costs you rent and the unrecovered operating expenses on empty space.
• Tenant improvements (TI): Dollars per square foot to ready the space. Warehouse renewals are cheap, roughly $1 to $3 per square foot. New warehouse tenants cost more, and office or flex build-out runs $5 to $15 or higher per square foot.
• Leasing commissions (LC): Typically 4 to 6 percent of total lease value for a new deal and 2 to 3 percent on a renewal, paid to the brokers.
• Free rent: Concessions offered to sign a new lease, modeled as months of abated rent at the start of the term.

Then apply mark-to-market. Re-lease each expiring space at today's market rent, not the expiring rent. If in-place rents are below market, which is common after years of modest bumps, rollover is upside. If a tenant is paying above market, rollover is a rolldown you must underwrite as a loss. This is why verifying market rent matters so much: the broker's mark-to-market thesis is only real if your comps support the market rent, and only valuable net of the TI, LC, and downtime it costs to capture. AcquiOS flags in-place rents that sit above or below market so you are not taking the broker's word for the upside.

Step 5: Set Market-Calibrated Assumptions

Your assumptions drive the output and must be defensible to an investment committee and a lender. The core categories for industrial:

• Market rent and growth: Set market rent per square foot by product type from your own comps, and grow it based on submarket supply and absorption, not a national headline. In a market with a heavy delivery pipeline, flat is more defensible than a hockey stick.
• Rollover assumptions: Renewal probability, downtime, TI, and LC as covered in Step 4, set per tenant rather than one blended number, since a credit distribution tenant and a small flex user roll very differently.
• General vacancy: A global vacancy and credit-loss factor of roughly 3 to 5 percent on top of the modeled rollover, taking care not to double count the downtime you already scheduled.
• Expense growth and taxes: Grow operating expenses at CPI, and reassess property taxes at your purchase price where the jurisdiction reassesses on sale. Taxes are a large, often non-fully-recoverable line.
• CapEx reserves: Roof, parking lot, and structural reserves, funded annually and separate from tenant-driven TI.
• Exit cap and financing: Quality bulk industrial has traded in roughly a 5.0 to 6.5 percent cap range depending on market and WALT, with long-WALT credit assets tighter. Add 25 to 50 basis points to your going-in cap for the exit, and model debt with a realistic DSCR floor and, for floating rate, a stressed coupon.

Step 6: Build the DCF and Calculate Returns

The DCF projects cash flow across the hold, applies the rollover schedule, and produces the return metrics. Structure it in this order:

1. Base rent: In-place rent by tenant with contractual escalations, and re-leased space at market rent after each expiration.
2. Reimbursement income: Recovered taxes, insurance, and CAM from Step 3, net of caps, non-recoverables, and vacant-space leakage.
3. Operating expenses: The full expense stack grown at CPI, with taxes reassessed.
4. Net operating income: Base rent plus recoveries minus operating expenses, tracked every year.
5. Leasing capital: TI, LC, and free rent scheduled at each rollover. This is lumpy and often turns a strong NOI year into a weak cash-flow year.
6. Debt service and reserves: Apply financing terms, compute DSCR annually, and fund CapEx reserves.
7. Exit proceeds: Apply the exit cap to forward NOI, net disposition costs, and repay the loan.

The model produces the three metrics your IC weighs: IRR (annualized return across all cash flows and the exit), cash-on-cash (current yield on equity), and equity multiple (total equity returned over equity invested). For value-add lease-up plays, also track yield-on-cost against the market cap rate, since the spread is the value creation. AcquiOS builds this structure into your existing Excel template from the abstracted leases rather than forcing your team onto a new model.

Step 7: Stress Test the Model

A model that only works at base case is not defensible. In industrial, the stress test is mostly about rollover and the exit:

1. Rollover stress: Your largest tenant vacates at expiration instead of renewing. Extend downtime, raise the TI to a new-tenant number, and re-lease at a conservative market rent. Does the deal still service its debt through the gap?
2. Mark-to-market stress: Market rents come in flat or below your base, so the broker's upside does not materialize. What is the IRR when the below-market spread you paid for does not close?
3. Cap rate expansion: Exit cap 50 to 75 basis points above going-in. On a long-hold asset this is often the single biggest driver of the return.

Sensitivity tables beat single scenarios. Build a two-axis grid of IRR across exit cap rate (rows) and market rent growth (columns), and run a separate look at the question that decides most industrial deals: what if the anchor does not renew? The consistent error is underwriting a clean mark-to-market while ignoring the capital cost and downtime to capture it. Weight your scenarios toward rollover concentration, tenant credit, and the supply pipeline, because those are what actually break industrial deals.

Frequently Asked Questions

How do I underwrite an industrial or warehouse deal?

Industrial underwriting is lease-driven. You assess the building's functionality, abstract every lease into base rent, escalations, options, and reimbursement structure, compute WALT, model expense recoveries under NNN or gross terms, and underwrite each rollover: downtime, tenant improvements, leasing commissions, and mark-to-market to today's rent. Building quality and tenant credit set the ceiling, while submarket supply and rollover concentration set the risk.

What is WALT and why does it matter?

WALT is the weighted average lease term remaining, weighted by square footage or by rent. It tells you how long the in-place income is contracted before you face releasing risk. A seven-year WALT single-tenant asset with an investment-grade tenant behaves like a bond, while a one-and-a-half-year WALT multi-tenant asset is a leasing play where TI, leasing commissions, and downtime drive the return. Always state whether you weight WALT by area or by rent.

What is the difference between NNN and gross leases in underwriting?

Under a triple-net (NNN) lease the tenant reimburses its pro-rata share of taxes, insurance, and CAM, so the landlord recovers most operating expenses and mainly bears vacancy and non-recoverable capital. Under a gross or full-service lease the landlord pays operating costs out of a flat rent and absorbs expense inflation. Modified gross sits between them, with the tenant paying increases over a base year. The structure changes which party carries expense growth and how you model recovery income.

How do I model TI and leasing commissions on rollover?

At each expiration, set a renewal probability, then blend the cost of a renewal and a new lease. Tenant improvements run lower on warehouse renewals, roughly $1 to $3 per square foot, and higher for new tenants or office and flex space at $5 to $15 or more. Leasing commissions are typically 4 to 6 percent of lease value for new deals and 2 to 3 percent on renewals, and new tenants carry six to twelve months of downtime before rent restarts. Schedule this leasing capital at each rollover, because it turns strong NOI years into weak cash-flow years.

Can I use AI to underwrite industrial deals?

Yes. Purpose-built CRE platforms abstract leases from PDFs, pulling base rent, escalations, expiration dates, options, and reimbursement structures into a structured table, populate your existing Excel model, and validate in-place rents against comparables. The tool handles the lease abstraction while the analyst keeps control of the WALT read, the rollover schedule, and tenant credit. AcquiOS is built for this workflow, so a multi-tenant model that took most of two days comes together in under an hour.