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Industrial Real Estate Guide

Warehouses, distribution centers, and flex space. Master triple-net leases, tenant credit analysis, and location-driven value.

Educational content only: This information does not constitute legal, tax, financial, or investment advice. Always consult qualified professionals before making investment decisions.

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Industrial Real Estate in One Page

Industrial real estate includes warehouses, distribution centers, manufacturing facilities, and flex space. The sector has been transformed by e-commerce and logistics demands.

Why Industrial?

  • Long-term leases: Typically 5-10+ years, providing income stability
  • Triple-net structures: Tenants pay operating expenses, taxes, and insurance
  • E-commerce tailwind: Last-mile delivery and logistics demand growth
  • Lower management intensity: Compared to retail or multifamily

Key Property Types

  • Bulk distribution: 100k+ SF, high clear heights (30'+), heavy truck access
  • Last-mile delivery: Infill locations, 20k-100k SF, proximity to population centers
  • Manufacturing: Specialized improvements, heavy power, HVAC requirements
  • Flex space: Office/warehouse hybrid, typically under 50k SF

Value = NOI / Cap Rate (with strong emphasis on tenant credit and lease term)

Lease Structures and Key Terms

Triple-Net (NNN) Leases

The standard in industrial: tenant pays base rent plus all operating expenses, property taxes, and insurance.

Landlord responsibilities (typically minimal):

  • Roof and structure (sometimes)
  • Debt service and capital reserves

Tenant responsibilities:

  • Property taxes, insurance, CAM
  • Interior maintenance and repairs
  • Utilities and janitorial

Rent Escalations

Common structures:

  • Fixed annual increases: 2-3% per year
  • CPI-based: Tied to inflation (often with caps and floors)
  • Market reset: Rent adjusts to market every 5 years

Tenant Improvement Allowances

TI allowances vary widely by space type and tenant needs:

  • Vanilla shell: $0-$5/SF for warehouse space
  • Office build-out: $20-$50/SF for flex space office component
  • Heavy manufacturing: Can exceed $100/SF for specialized improvements

Watch for: Specialized improvements that limit re-tenanting options if the current tenant leaves.

Underwriting Fundamentals

Tenant Credit Analysis

Industrial underwriting is heavily driven by tenant credit quality:

  • Investment grade tenants: Amazon, FedEx, major retailers (lower cap rates, easier financing)
  • Mid-market credit: Regional operators, established businesses (moderate risk)
  • Startup/unknown tenants: Higher cap rates, personal guarantees required

Location Analysis: The Three Layers

1. Macro: Market and Submarket

Port proximity, highway access, labor availability, and population centers. Last-mile facilities need dense population; bulk distribution needs highway and rail access.

2. Site: Access and Functionality

Truck turning radius, loading dock count and configuration, trailer parking, clear heights, column spacing, power capacity.

3. Lease Terms and Tenant Quality

Remaining lease term, renewal options, tenant creditworthiness, rent vs market comparison.

Functional Obsolescence Risk

Key physical attributes that impact value:

  • Clear height: Modern facilities: 28-36'+; older: 16-24' (limits tenant pool)
  • Loading docks: Ratio matters (1 dock per 10k SF is common for distribution)
  • Column spacing: Wider spacing = more flexible for modern racking systems
  • Power capacity: Critical for cold storage, data centers, manufacturing

The Industrial Underwriting Checklist

  • ✓ Verify in-place rent vs market rent
  • ✓ Confirm lease structure (NNN vs gross)
  • ✓ Analyze tenant credit and financials
  • ✓ Calculate remaining lease term and renewal probability
  • ✓ Estimate downtime and re-leasing costs if tenant leaves
  • ✓ Model expense reimbursement true-ups (if applicable)
  • ✓ Check property tax assessment and potential increases

Use our investment calculator to model DSCR, debt yield, and cash-on-cash returns.

Due Diligence Checklist

Lease and Financial Review

  • Executed lease with all amendments
  • Rent roll verification
  • Historical financials (3 years) and current year P&L
  • Expense reimbursement reconciliation
  • Tenant financials and credit reports (if available)

Physical Inspection Priorities

  • Roof condition and age (most expensive capital item)
  • HVAC systems (if climate-controlled or office component)
  • Loading dock condition and functionality
  • Parking and truck maneuvering areas (paving, striping)
  • Fire suppression systems (sprinklers, inspections current)
  • Electrical capacity and panel condition
  • Environmental Phase I (always; Phase II if concerns)

Market and Competition

  • Comparable lease comps ($/SF, lease terms, TI allowances)
  • Vacancy rates and absorption trends in submarket
  • New construction pipeline (supply pressure)
  • Tenant demand drivers (e-commerce, manufacturing, logistics trends)

Common Mistakes to Avoid

Overvaluing Below-Market Rents

If in-place rent is $3/SF and market is $6/SF, don't assume you can immediately double the rent. Factor in lease expiration timing, downtime, TI costs, and leasing commissions.

Ignoring Functional Obsolescence

A 100k SF building with 18' clear heights and inadequate loading may not attract modern logistics tenants, regardless of location.

Weak Tenant Credit = Higher Risk

Single-tenant buildings leased to unknown or financially weak tenants are essentially land value if the tenant fails. Underwrite downside scenarios seriously.

Overlooking Environmental Risks

Industrial properties often have prior manufacturing or chemical use. Always get a Phase I environmental assessment. Contamination can destroy a deal.

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