How to Underwrite a Small Industrial Deal

Small industrial — single-tenant flex, multi-tenant small-bay, warehouse and light-distribution — is a deep, durable asset class, but the underwriting hinges on lease structure and re-leasability rather than the unit economics that drive multifamily. Here's the playbook.

1. Map the tenancy

Start with who pays rent and for how long:

• Single-tenant: one lease carries the whole building. Clean cash flow, but 100% rollover risk — when that lease ends, the property can go fully dark. Tenant credit and remaining term dominate the risk.
• Multi-tenant: several smaller leases. More diversified income and staggered rollover, but more management and more frequent re-leasing.

For each lease capture remaining term, escalators (commonly 2.5–3.5%/yr), and renewal options, then compute WALT (weighted average lease term) — the single best read on income durability and rollover exposure.

2. Determine the reimbursement structure

This is where industrial NOI is made or lost:

• Triple-net (NNN): the tenant reimburses property taxes, insurance, and CAM. The landlord receives a near-net rent — but rarely a zero-cost one (more below).
• Modified gross: the landlord pays operating expenses and is reimbursed only for increases over a base year (an expense stop). Year-one reimbursement is often zero; the landlord carries the base.
• Full-service gross: the landlord pays everything; rent is higher to compensate.

The structure tells you which expenses land on the landlord's books — and therefore what the true NOI is.

3. Broker NOI vs true NOI

Even "true NNN" industrial usually leaves the landlord real costs: its own insurance, management, non-reimbursed repairs, a vacancy/structural reserve, and sometimes a tax-reassessment gap before the tenant true-up. So every industrial deal has two NOIs:

• Broker NOI = gross in-place rent (the OM headline).
• True NOI = gross rent − the landlord's actual costs.

From these, two cap rates against the same price: the broker cap (always higher) and the true cap (what you actually earn). Underwrite to the true cap. The full mechanic is in Broker Cap vs True Cap; the cap-rate calculator shows both, and the NNN analyzer handles the reimbursement netting.

4. Check the physical basics

Industrial value is functional, not cosmetic. The features that drive re-leasability (and therefore your exit and your rollover risk):

• Clear height — usable vertical space. Modern logistics wants 28–36'+; older small-bay at 16–24' serves a shallower tenant pool. Low clear height caps the tenant universe.
• Coverage — building area ÷ land area. Low coverage can be a feature (yard/parking, even an IOS-style covered-land angle) rather than a defect — don't penalize land-heavy sites with a building-SF lens.
• Dock-high vs grade-level doors, truck court depth, power/amps, column spacing, sprinkler — each narrows or widens the tenant pool.

These don't go in a formula, but they set the rent, downtime, and exit cap you can credibly assume.

5. Stress rollover and dark-period risk

The biggest small-industrial risk is the gap at rollover. Model it explicitly:

• Downtime / dark months — months of vacancy after a lease expires.
• Landlord-absorbed expenses — during the dark period the landlord pays the normally-reimbursed taxes/insurance/CAM with no offsetting rent.
• Re-leasing cost — tenant improvements and leasing commissions (TI/LC) to land the next tenant.

On a single-tenant deal, one rollover is a 100% vacancy event — so WALT, tenant credit, and a credible re-leasing assumption matter more than a few basis points of going-in cap.

6. Value, finance, and returns

• Value = true forward NOI ÷ a conservative exit cap (assume the exit cap is at least your going-in cap; don't manufacture returns from compression).
• DSCR sizes the loan (~1.20–1.25x minimum) — check it on both I/O and amortizing debt service. (DSCR calculator.)
• Returns — build the equity cash-flow stream (with the rollover/dark-period hit in the affected year) and compute IRR + equity multiple together. (IRR calculator.)

Putting it together

A small-industrial underwrite reads: tenancy + WALT → reimbursement structure → broker vs true NOI → physical re-leasability check → rollover/dark-period stress → value on true NOI at a conservative exit cap → DSCR-sized debt → IRR and equity multiple. Lease structure and re-leasability carry the analysis; the cap rate is the output, not the input.

UpsideIQ models industrial natively — NNN vs modified-gross reimbursements, landlord-actual expenses, broker vs true cap, WALT, and dark-period impact — and grades it against your criteria. For land-heavy / outdoor-storage deals, see How to Underwrite an IOS Deal. Check your math with the free cap-rate, NNN, and DSCR calculators.

Related teardown: How I underwrote a $10.8M industrial sale-leaseback — why rent coverage, not the 7% cap, nearly killed it.