Industrial and Logistics REPE Underwriting

Industrial and logistics real estate is one of the largest institutional asset classes in REPE — and one that shows up constantly in interviews because its underwriting mechanics differ from multifamily in ways that trip up candidates who only know rent rolls and cap rates. Long lease terms, triple-net structures, tenant credit quality, and building specifications all change how you build the pro forma and size debt. This guide covers the full industrial underwriting workflow.

How industrial differs from multifamily

| Characteristic | Industrial / Logistics | Multifamily | |---------------|----------------------|-------------| | Lease term | 3–15 years (often 5–10) | 6–15 months | | Lease structure | NNN (triple net) common | Gross or modified gross | | Tenant count | 1–5 tenants typical | 100–500+ units | | Revenue driver | Rent/SF × leased SF | Units × rent × occupancy | | Expense burden | Tenant pays most expenses (NNN) | Landlord pays operating expenses | | Capex | Roof, structure, parking (landlord) | Unit interiors, common areas | | Credit risk | Tenant default = major vacancy event | Diversified across many tenants | | Location driver | Highway access, port proximity, labor pool | Demographics, schools, employment |

The single-tenant or few-tenant nature of most industrial assets means tenant credit quality is as important as the real estate itself — a point interviewers test directly.

Revenue build: rent per SF and lease structure

Base rent

Annual Base Rent = Leased SF × Rent per SF per Year

Industrial rents are quoted per SF per year (not per month like multifamily). Always confirm whether the quoted rent is NNN (tenant pays taxes, insurance, CAM) or gross (landlord pays expenses from rent).

Lease types and what they mean for NOI

Triple Net (NNN): Tenant pays property taxes, insurance, and common area maintenance in addition to base rent. Landlord's NOI ≈ base rent minus minimal landlord expenses (management fee, reserves).

Modified Gross: Landlord pays some expenses (often structure/roof); tenant pays operating expenses above a base year.

Full Service Gross: Landlord pays all operating expenses from rent — rare in modern industrial.

For NNN industrial (the most common institutional product):

NOI ≈ Base Rent − Management Fee − Capital Reserves

Operating expenses are largely the tenant's problem, which is why industrial NOI margins are high (85%–95% of gross rent) compared to multifamily (55%–65%).

Rent escalations

Industrial leases typically include fixed annual escalations (2%–3% per year) or CPI-linked bumps. Model these explicitly in the pro forma — they're contractual and predictable, unlike market rent growth assumptions in multifamily.

Year N Rent = Base Rent × (1 + Escalation Rate)^(N−1)

Or for CPI-linked: apply an assumed CPI rate (2%–3%) to the prior year's rent each year.

Expense build: minimal for NNN

For a standard NNN industrial asset:

| Category | Typical Range | Notes | |----------|--------------|-------| | Property Taxes | Paid by tenant (NNN) | Verify lease — landlord may retain reassessment risk | | Insurance | Paid by tenant (NNN) | Same | | CAM / Operating | Paid by tenant (NNN) | Same | | Management Fee | 2%–4% of rent | Landlord expense | | Capital Reserves | $0.15–$0.30/SF/year | Roof, parking, structural | | Vacancy allowance | 0%–5% | Single-tenant = 0% if leased; multi-tenant needs allowance |

Property tax reassessment trap (still applies): even in NNN leases, the landlord may bear the risk of tax reassessment above a base year. If purchase price triggers a reassessment, the tenant's NNN payment increases — but some leases cap the pass-through, leaving the landlord with the excess.

Tenant credit and lease rollover

Tenant credit analysis

For single-tenant industrial, the tenant IS the asset:

Key metrics:
  Tenant revenue and EBITDA (public filers: 10-K)
  Credit rating (if rated)
  Remaining lease term (WALT — weighted average lease term)
  Renewal probability (industry, location, buildout investment)

A 500K SF warehouse leased to an investment-grade logistics company for 10 years is a bond-like cash flow. The same building with a local distributor on a 3-year lease is a real estate bet with significant rollover risk.

Lease rollover and downtime

When a tenant vacates, industrial assets face re-tenanting downtime that multifamily doesn't:

Downtime Assumptions:
  Marketing period: 6–12 months (large boxes take longer)
  TI/buildout for new tenant: $5–$20/SF depending on use
  Leasing commissions: 4%–6% of total lease value
  Free rent concession: 1–3 months common for large spaces

Model rollover explicitly in hold-period analysis — don't assume the tenant renews at expiration without stress-testing vacancy.

Weighted Average Lease Term (WALT)

WALT = Σ (Remaining Lease Term_i × Rent_i) ÷ Total Rent

WALT above 5 years on a stabilized asset supports lower cap rates and higher LTV. WALT under 3 years is a value-add or credit story, not a core acquisition.

Debt sizing for industrial

Industrial qualifies for competitive financing:

Stabilized, investment-grade tenant:
  LTV: 65%–75%
  DSCR minimum: 1.25x–1.30x
  Debt yield: 8%–10%
  Term: 5–10 years fixed, 25–30 year amortization

Value-add / rollover risk:
  LTV: 55%–65%
  DSCR: 1.35x+ or interest-only during lease-up
  Shorter term, possible recourse

DSCR for NNN industrial is straightforward because NOI ≈ rent minus minimal expenses. The challenge is sizing on in-place rent when rollover is approaching — a lender won't size on a lease that expires in 18 months without a renewal or re-tenanting plan.

Exit assumptions

Exit Value = Forward NOI ÷ Exit Cap Rate
Forward NOI = Year N+1 NOI (with escalations through hold period)
Exit Cap Rate = market cap for industrial in submarket + conservatism buffer

Industrial cap rates vary significantly by:

• Location (infill vs. exurban; port market vs. secondary)
• Building quality (clear height, dock doors, floor load, sprinkler)
• Tenant credit (investment-grade tenant = lower cap)
• Lease term remaining at sale (long WALT = lower cap)

Typical range: 4.5%–7.0% for stabilized logistics in major markets (2024–2026).

Common interview questions

"How is industrial underwriting different from multifamily?" Fewer tenants (often single-tenant), NNN lease structure (tenant pays expenses), rent quoted per SF/year with contractual escalations, tenant credit is critical, and rollover involves long downtime and TI costs.

"What is a NNN lease?" Triple net: tenant pays base rent plus property taxes, insurance, and CAM. Landlord's NOI is essentially base rent minus management fee and reserves. High NOI margin but concentrated tenant risk.

"How do you underwrite a single-tenant industrial building?" Tenant credit analysis first, then remaining lease term (WALT), then rent/SF vs. market, then rollover scenario at lease expiration. Debt sized on in-place cash flow with explicit rollover stress test.

"What is WALT and why does it matter?" Weighted average lease term — the rent-weighted average remaining lease duration. Long WALT supports lower cap rates and higher leverage; short WALT means rollover risk and lower pricing.

The takeaway

Industrial REPE underwriting is simpler on expenses (NNN) but more concentrated on tenant risk. The interview skill is balancing high NOI margins against single-tenant dependency, modeling lease escalations contractually, and stress-testing rollover at expiration. Master the NNN structure and tenant credit framework, and industrial cases become one of the cleaner pro formas in REPE interviews.