Industrial & Logistics: From Bulk to Last‑Mile—What Moves Cap Rates
- Alketa Kerxhaliu
- Oct 20
- 22 min read
In the post-pandemic landscape, industrial real estate has split into clear submarkets – large “bulk” distribution centers, mid-sized logistics facilities, and small last-mile warehouses – each exhibiting different performance and risk profiles. This report provides a strategic market brief and underwriting guide on why cap rates diverge across these logistics asset classes. Using the MMCG database (compiling national industrial market data), we examine key value drivers, compare segment fundamentals, assess the impact of macro volatility and supply cycles, and outline practical underwriting risks. The report concludes with five lender-focused takeaways for defending cap rates and planning exit strategies in today’s market.
Key Drivers of Cap Rate Divergence in Logistics Assets
Investors and lenders are increasingly discerning about which industrial assets they finance. Cap rate** – the yield or return on a property’s income – varies between bulk warehouses, mid-box facilities, and last-mile (small-bay) warehouses due to fundamental differences in how these assets generate value. Three primary drivers explain this divergence:
Throughput & Velocity: Logistics facilities differ in how quickly goods flow through them. High-throughput properties (e.g. e-commerce sortation centers or cross-dock last-mile hubs) handle inventory at lightning speed, with goods arriving and leaving in hours or days. These assets are mission-critical to supply chains, as delays directly impact sales and customer service. In contrast, bulk warehouses may store goods for weeks (slower turnover). High velocity can justify lower cap rates because tenants heavily rely on those locations – they are less likely to vacate even at higher rents since operational disruption costs far outweigh rent expense. Moreover, rapid inventory turnover means revenue is generated quickly relative to space, supporting rent payments. Inventory turnover data from the MMCG database illustrates this dynamic: industry-wide, turnover plummeted to ~1.3x during pandemic bottlenecks (as goods sat in storage), then recovered to ~2.2x recently as supply chains normalized. Faster turnover improves tenants’ ability to pay rent and keep facilities utilized, which underpins stronger valuations for high-throughput logistics assets.
Rent Coverage Ratios: A key metric for logistics real estate is how rent costs compare to the economic value of goods handled (often expressed as rent per square foot relative to revenue per pallet or per order). Generally, in large distribution operations, occupancy cost is a small fraction of total logistics costs or sales. According to MMCG’s research data, third-party logistics operators (3PLs) spend only about 3.5% of their revenue on facility rent on average. This low rent-to-revenue ratio (high coverage) means tenants can absorb rent increases – supporting landlord pricing power and lower cap rates – especially in prime facilities where location efficiency boosts the tenant’s revenue per square foot. By contrast, smaller local tenants (e.g. a regional distributor or service contractor in a 20,000 SF warehouse) might have higher relative occupancy costs and thinner margins, making them more sensitive to rent spikes. Assets serving tenants with strong rent coverage (low occupancy cost burden) tend to command premium valuations. High coverage ratios signal that the real estate is not a limiting expense, allowing owners to push rents without as much risk of tenant default or vacancy.
Location Frictions (Urban Access & Tier-1 vs Tier-2): Location is perhaps the most obvious driver of cap rate differences. Facilities in dense urban infill areas, near major ports or transport hubs, or in Tier-1 distribution nodes have unique supply-demand dynamics. Urban last-mile warehouses face severe supply constraints – there’s limited land for new logistics space in city cores, so existing small warehouses enjoy persistent demand. For instance, the MMCG database indicates that industrial properties under 150,000 SF (which tend to be infill and last-mile) have an average vacancy of only ~4.8%, roughly half the rate of large-format facilitiescorebridgefinancial.com. This scarcity and guaranteed demand for urban proximity compress cap rates for last-mile assets. Additionally, proximity to ports or intermodal hubs creates value: space near the Los Angeles/Long Beach port complex or inland port facilities is highly prized by importers and 3PLs, supporting higher pricing. In fact, 41% of large 3PL leases in 2024 were in seaport-proximate warehouses, reflecting how port access drives tenant demand. Conversely, properties in Tier-2 markets (smaller distribution cities or far suburban locales) face higher cap rates due to location frictions in reverse – fewer large tenants are available, and those markets have less liquidity. Tier-1 markets (Los Angeles, Dallas, Chicago, Atlanta, etc.) historically see more investor competition and lower yields, whereas secondary logistics hubs must offer yield premiums to attract capital. Location-driven “friction” (zoning limits, land scarcity, or tenant network preferences) thus plays a major role in cap rate divergence: infill and port-adjacent assets often trade at cap rate discounts (pricing premiums), while remote or oversupplied locations trade at higher cap rates reflecting greater risk.
Bottom line: Properties with faster throughput, stronger rent coverage, and friction-filled locations (high barriers or strategic importance) tend to enjoy lower cap rates (higher values), all else equal. These factors mitigate risk and bolster income growth, which investors reward. Next, we examine how these drivers manifest in the performance of bulk, mid-box, and last-mile logistics assets.
Performance Divergences: Bulk vs. Mid-Box vs. Last-Mile Assets
Not all industrial real estate is created equal – recent market data shows clear performance distinctions between large “bulk” distribution centers, mid-sized logistics facilities, and small-bay last-mile warehouses. Table 1 summarizes key metrics for each segment, using MMCG’s industrial database figures:
Table 1 – Segment Fundamentals: Small-bay last-mile warehouses maintain the lowest vacancy and steady rent growth, but often trade at slightly higher cap rates due to shorter leases and granular management. Mid-box facilities have seen vacancy rise and rent growth stall, while large bulk distribution centers face the highest vacancy and, in some corridors, rent declines. Cap rates for core mid-box and bulk assets now hover around 6%, after expanding ~150 basis points over the past two years, erasing the prior yield gap between big and small assetscorebridgefinancial.com.
Bulk Logistics (Big-Box Distribution Centers)
“Bulk” industrial assets – massive regional distribution centers (often 300,000 to 1,000,000+ SF) – were the darlings of the e-commerce boom. Early in the pandemic recovery, investors paid top dollar for big-box warehouses leased to major retailers, compressing cap rates below 5% at the peak. These properties offered long-term leases (5–10+ years) with well-known credit tenants, making them bond-like investments. However, the past 18 months have exposed the risks in this segment. A nationwide surge of new supply has hit the bulk warehouse market, driving vacancy to its highest in over a decade. According to MMCG data, vacancy for buildings over 100,000 SF jumped from record lows to over 8% in 2025 (an increase of 380 bps since early 2023). In many big-box nodes, supply has overshot demand – developers riding the 2020–2022 boom broke ground on huge projects that now compete for fewer tenants.
For example, several Sun Belt and Midwest markets are notably overbuilt. In Phoenix, logistics buildings of 100–500k SF (mid-to-large big-box product) saw vacant space balloon by 19 million SF since 2019, pushing that segment’s vacancy to about 20%. Markets like Austin, Indianapolis, Greenville-Spartanburg, and San Antonio are similarly experiencing a prolonged glut of big-box space. Even in core distribution hubs, the pullback of Amazon and other large occupiers has left new facilities unleased – as one industry observer noted, developers “overestimated demand” when e-commerce giants scaled back expansion planscorebridgefinancial.com. The result is that bulk warehouse landlords are now competing for tenants, conceding on rents and offering incentives. Market asking rents for big-box logistics properties have stagnated or even declined year-on-year, a sharp reversal from double-digit growth in 2021–2022. Large landlords are giving an average of ~3 months free rent on 5–7 year leases to secure deals (a practice unheard of during the 2021 boom). One Inland Empire example saw 6 months free on a 5.5-year lease for a newly built 177,000 SF warehouse – highlighting the tenant-favorable conditions in the bulk segment today.
From a cap rate perspective, the surge in interest rates and softer fundamentals have expanded yields on bulk assets significantly. Prime big-box cap rates have moved from the mid-4% range in 2021 to around 6% by late 2025, even for stabilized, fully leased warehouses. Lesser-quality or vacant big boxes trade higher. The good news is that many large developments have secured anchor tenants (often via build-to-suit or pre-leasing), which cushions vacancy in the >500k SF category. Indeed, properties above 500,000 SF enjoyed “healthier pre-leasing” in 2024-25 and saw demand hold up slightly better than the 100–500k tranche. But broadly, bulk logistics assets have lost some pricing power – their cap rates no longer carry a premium as they once did. Underwriting bulk distribution now demands careful scrutiny of local supply waves and tenant commitment length. Long-term, these regional hubs still play a critical role (and benefit from tenants’ low rent coverage ratios), but the current cycle has clearly shifted negotiating leverage towards tenants, tempering rent growth and valuation multiples.
Mid-Box Logistics Facilities
Mid-box warehouses (roughly 50,000–250,000 SF) represent an intermediary class, often serving as secondary distribution hubs or regional fulfillment centers. Performance in this segment has been mixed, skewing weaker in markets where speculative construction targeted the mid-size format. Nationally, vacancy in the 50–100k SF range has risen to about 5.7% (up ~240 bps since early 2023), and mid-size buildings are leasing more slowly – spaces in the 50–100k SF bracket now spend a median of ~12 months on the market, versus just 4–5 months for small spaces. When extending into the 100–250k SF range, vacancy rates often approach those of the big-box category, particularly in oversupplied corridors. As noted, the bulk of recent speculative development has been in mid-box logistics projects (100–500k SF), which means many mid-box facilities are competing head-to-head with larger ones for tenants. In high-growth metros like Indianapolis or Dallas, dozens of 100–300k SF spec buildings delivered in the past year, testing the depth of tenant demand.
Rent growth for mid-box assets has essentially flattened out in 2024–2025. Owners of these properties have less leverage to push rents now that alternatives exist for tenants. CoStar data (MMCG) show that asking rents in mid-size segments peaked earlier (many in 2023) and have since softened from those highs. In some markets, effective rents are down slightly as landlords negotiate to fill space. Consequently, cap rates for mid-box logistics have moved in tandem with the broader market – expanding into the ~6% range on average – and in oversupplied locales they may exceed that. Essentially, mid-box valuations are now on par with or slightly above prime big-box yields, reflecting the segment’s exposure to current vacancy pressures.
That said, mid-box warehouses can occupy a sweet spot in certain regions. They cater to a diverse mix of tenants (3PLs, regional distributors, light assembly, etc.) and often are multi-tenant, which diversifies rent rolls. If located in a major metro area’s outskirts or in a strong secondary market with less new construction, mid-box facilities can still perform well. Pre-leasing on new mid-box developments has been low – often well under 50% at delivery in 2024 – which is a warning sign. But this also means future supply might taper quickly: developers have already pulled back on starts because higher cap rates and empty spec buildings made financing tougher. In short, mid-box assets are experiencing a near-term adjustment with higher vacancy and neutral rent growth, but if demand gradually absorbs the glut (and construction stays subdued), this segment could stabilize. Underwriting mid-box deals now should build in longer lease-up periods and cautious rent assumptions, especially in corridors where construction overshot (e.g. central Texas, parts of the Southeast).
Last-Mile (Small-Bay Industrial)
Last-mile industrial, typically small-bay warehouses under 50,000 SF in infill or urban-edge locations, has emerged as a resilient standout in the logistics sector. These properties serve critical “final link” functions – housing local distribution, service contractors, suppliers, and e-commerce delivery stations that need to be near end consumers. The demand–supply imbalance in this sub-sector is striking. Small-bay vacancy remains extremely low nationwide: buildings under 50k SF are holding around 4–5% vacancy on average, only up slightly from historic lows. In some high-growth metros (e.g. Nashville, Orlando, Charlotte), an acute shortage of small industrial space prevails, with vacancies at 2–3% as in-migrating businesses snap up any available bays. Moreover, when small spaces do open up, they backfill quickly – median listing time for <50k SF spaces in 1H 2025 was just 4.6 months, compared to over 17 months for >100k SF warehouses. This brisk lease-up velocity speaks to persistent tenant demand for small units, whether it’s a local HVAC company needing a 10,000 SF depot or an e-commerce firm staging last-mile inventory close to customers.
On the supply side, new construction of small-bay product is almost negligible in most markets. Building modern logistics facilities on infill parcels is challenging due to high land costs and zoning constraints. Indeed, light industrial development now represents just 0.5% of existing small-bay stock – a very low replenishment rate – as construction costs and financing hurdles limit new projectscorebridgefinancial.comcorebridgefinancial.com. This effectively locks in a supply-constrained scenario for last-mile warehouses. Rent growth has correspondingly outperformed in this sub-sector: asking rents for sub-50k SF spaces hit all-time highs in 2025, and rents for the smallest suites (under 10k SF) have surged ~40% cumulatively since 2020corebridgefinancial.com. While rent growth has begun to moderate (small tenants can only absorb so much increase year after year), it remains positive in most cities – a stark contrast to the flattening or declines seen in larger logistic facilities.
Interestingly, the cap rate profile for small-bay industrial has been evolving. Historically, these properties traded at higher cap rates than big boxes because they involve many small tenants (more management and rollover risk) and were dominated by local investors. Yields in the 6–7%+ range were common for older multi-tenant industrial parks. However, as fundamentals have strengthened, institutional capital is now shifting toward shallow-bay portfolioscorebridgefinancial.com. Investors are attracted by the diversified tenant base, strong occupancy, and value-add potential (raising below-market rents, condo-ing units, etc.). As a result, cap rates for quality infill industrial have compressed and converged with the broader market. Many small-bay assets now trade in the mid-6% range, and in top-tier infill locations or portfolio sales, cap rates can even approach 5%–6%. Lenders should note that while small-bay deals might have shorter leases (often 1–3 year terms vs 5–10 years for big boxes), the stickiness of tenants can be high – small businesses can’t easily forego their only warehouse for “just-in-time” operationscorebridgefinancial.com, and moving costs deter frequent relocation. Thus, despite higher turnover, the last-mile segment’s stability has improved. Overall, last-mile industrial is currently a cap rate-defensive play: its values are buttressed by enduring demand and limited new supply. Underwriting assumptions for small-bay properties can lean on sustained occupancy and steady rent growth, but must account for active management and leasing costs given the tenant churn.
Macro Volatility, Construction Waves & E-Commerce Normalization
Beyond asset-specific factors, the broader economic and supply cycle context is crucial in understanding cap rate movements in industrial real estate. The past few years have delivered a whipsaw of conditions – from surging e-commerce demand in 2020–2021 to interest rate shocks and a construction boom in 2022–2024 – and now a phase of normalization and uncertainty. Several macro-level trends are impacting pricing power and occupancy across logistics real estate:
Interest Rates and Capital Markets: Perhaps the biggest macro factor for cap rates has been the rapid rise in interest rates since 2022. Industrial cap rates, which hit record lows (~4–5% for core assets) in 2021 when financing was cheap, have expanded by roughly 150 basis points on average in response to the higher cost of capital. Investors now require higher going-in yields to offset more expensive debt and increased economic risk. This repricing has been universal – affecting even the best assets – but properties with weaker fundamentals have seen cap rates blow out further. For example, a stabilized multi-tenant warehouse might have sold at 4.5% in 2021; now it trades near 6%. If an asset also has vacancy or short leases, buyers may underwrite an even higher cap rate (7%+) or simply stay on the sidelines. The spike in cap rates has caused many deals to fall through and sent some developers back to the drawing board.
Construction Wave Peaking: Industrial development hit all-time highs in 2022–2023, adding supply at an unprecedented clip. Nationally, new completions peaked at ~150 million SF in Q4 2023 (about 0.8% of inventory in one quarter). This wave was fueled by optimistic demand projections and ample capital. However, as signs of slowing absorption emerged in 2023, lenders and developers pulled back. Groundbreakings declined steadily, reaching a decade low by late 2024. The pipeline is now thinning: by mid-2025, quarterly deliveries fell to 64 million SF (0.3% of inventory) and are projected to hit an 11-year low in 2026. In practical terms, the oversupply pressure is likely peaking now. Many speculative projects delivered in 2024 are still leasing up (especially mid-box product), but far fewer new ones are starting. This is a silver lining for the mid-term outlook – the market is self-correcting as financing tightens. Until the excess is absorbed, though, landlords in construction-heavy markets face elevated vacancy and weaker pricing power. We see this clearly in tenant-favorable leasing: with so many new options, big tenants can negotiate concessions and lower effective rents. Only when the construction wave subsides (late 2025 into 2026) will landlords in those corridors regain a firmer footing to push rents again.
E-Commerce Growth Normalization: A critical demand-side consideration is the normalization of e-commerce and goods consumption after the pandemic surge. From 2020 to 2022, e-commerce sales shot up dramatically, prompting occupiers to expand warehouse footprints aggressively. By 2023–2024, that growth trajectory leveled off to a more sustainable rate. Retailers found themselves with perhaps more space than needed as online sales growth reverted to its long-term trend. Additionally, companies started fine-tuning their inventory strategies – after overstocking in 2021 (just-in-case inventory), many worked down inventory levels in 2023 (a return toward just-in-time efficiency). U.S. import volumes in 2024 held steady, even slightly below 2021’s peak, reflecting consumers’ reduced appetite for goods post-stimulus. All of this translated to a noticeable cooling in industrial space demand. In fact, national net absorption turned negative in Q2 2025 for the first time since 2010, a clear inflection point. Logistics tenants are no longer gobbling up space at the frenzied pace seen during 2021. 3PLs (who comprised 34% of bulk leasing activity in 2024) have become more cautious, and some are subleasing excess space. The normalization means that landlords cannot count on exponential demand growth to bail out aggressive underwriting. Rent growth has accordingly downshifted: as noted, market rent growth slowed to about 1.4% YoY in 2025Q4 (versus ~9% YoY in 2022). Essentially, the easy gains from e-commerce’s rise have been realized; now industrial demand will track more closely with overall economic and trade growth.
Occupancy and Pricing Power: The combination of rising vacancy (from new supply and cautious demand) and higher financing costs has shifted pricing power notably in favor of tenants/buyers in the short run. Landlords who had unprecedented leverage in 2021 (raising rents at will, zero free rent) are now competing on offers. The reintroduction of tenant improvement packages and free rent – e.g. major REITs reporting ~2.8% of lease value given as free rent in recent deals, up from near 0% a year prior – exemplifies this power shift. For asset pricing, it means buyers are underwriting flatter NOI growth and demanding risk premiums. However, this environment is also separating the wheat from the chaff: well-located, high-throughput assets with quality tenants are retaining occupancy and can still achieve rent bumps on lease expirations (thanks to the huge rent increases of 2021–22, many in-place rents are below market). These stronger assets will likely defend their cap rates better in a high-rate world. By contrast, generic big-boxes in fringe locations or in overbuilt submarkets face rent stagnation and higher vacancy, which can lead to a vicious cycle of value erosion (higher cap rate demanded due to risk, which lowers value, making refinancing trickier, etc.).
In sum, the macro climate of the past two years has introduced volatility that directly affects underwriting: cap rates are higher across the board due to interest rates; occupancies are more uncertain due to the supply hangover and normalized demand; and rent growth is modest for now, putting a premium on accurate market selection and asset quality. Lenders should anticipate that the next 12–24 months remain a tenants’ market in many locales. Prudent underwriting will account for these macro headwinds, while recognizing that the industrial sector’s long-term drivers (e-commerce, supply chain modernization) are still intact. Once the current uncertainty ebbs, capital is expected to favor industrial again given its historically strong fundamentals and lower capital expenditure profile. The challenge is bridging this interim period with realistic assumptions.
Strategic Underwriting Risks and Considerations
With the above landscape in mind, we identify several underwriting risk factors for industrial & logistics assets at this stage in the cycle. A strategic approach to these risks will differentiate successful loans/investments:
Overbuilt Corridors & Absorption Risk: Certain markets and segments now suffer from excess supply, which poses lease-up and occupancy risks. Underwriters must scrutinize local supply-demand metrics. For example, if a subject property is a 200,000 SF warehouse in a corridor where 5 similar buildings just delivered, one should conservatively model longer downtime and possibly additional concessions to attract tenants. The MMCG database highlights markets like Phoenix, Indianapolis, Austin, and the Inland Empire where speculative construction in the mid-box and bulk segment will take 2–3+ years to absorb at normal demand pace. Properties in such corridors carry higher risk of prolonged vacancy or downward rent pressure. Lenders may mitigate this by requiring stronger sponsorship and more upfront reserves (to cover a drawn-out lease-up). Emphasis should also be on site quality: the best-located and designed facilities will eventually lease first. A generic big-box off the beaten path may struggle to ever achieve pro forma rents if the competition has brand-new space closer to the freeway or population center. In short, know your submarket’s pipeline – an otherwise solid industrial loan can sour if the property is in the crosshairs of a construction wave without tenant demand to match.
Tenant Credit and Lease Term Stratification: The industrial tenant universe is broad, ranging from Amazon and Home Depot down to local mom-and-pop distributors. This creates a spectrum of credit risk that should be reflected in underwriting. Bulk assets often have a single or few large tenants – potentially investment-grade companies or well-capitalized 3PLs – which is a credit strength but also a concentration risk. If that one tenant downsizes or defaults, the landlord faces a huge backfill challenge. Mid-box and especially small-bay assets, on the other hand, house dozens of smaller tenants. Individually, these tenants carry higher default risk (small businesses can be vulnerable in downturns), but the diversification means the impact of any one failure is muted. Recent trends show that large firms can and will consolidate space when the economy softens (e.g. big retailers returning space to the market)corebridgefinancial.com, whereas smaller businesses often cannot easily give up their only warehouse (it’s fundamental to daily operations). Underwriting should therefore evaluate not just the credit rating of tenants but also their dependency on the space. A strong guarantor on a lease is ideal, but even absent that, a tenant deeply embedded in the local economy (like a building materials supplier with a unique location serving a metro’s contractors) may pose less vacancy risk than their size implies. Lenders should stratify rent rolls by tenant type: How much of the income comes from large national 3PLs vs. regional firms vs. small locals? Are lease expirations staggered or concentrated? Given that 3PLs now account for over one-third of bulk leasing, consider exposure to the logistics industry cycle – 3PLs can rapidly expand or contract based on retail trends. It’s prudent to build covenants or reserves around any outsized tenant (for instance, if one tenant is 50%+ of space, require a DSCR cushion or springing recourse if they vacate). Finally, lease term is key: short leases (common in small-bay) mean rollover risk, but also opportunity to mark rents to market if rents are rising. Long leases (common in big-box) provide income stability but can lead to mark-to-market risk at loan maturity if the lease rolls over then. A balanced rent roll with staggered maturities and a mix of credit profiles is ideal, and underwriting should stress test income under plausible tenant default/rollover scenarios.
Labor and Supply Chain Cost Sensitivity: The profitability of logistics operations – and hence their ability to pay rent – is influenced by labor and transportation costs. Recent macro trends include a tighter labor market with rising wages for warehouse workers, and higher transportation costs (fuel, trucking rates) at times of volatility. Many tenants cannot fully pass these increased costs to customers due to competitive pressures. Underwriters should be mindful of properties in locations with labor challenges or high cost of doing business. For instance, a distribution center in a region with labor shortages might face operational issues (tenants can’t staff the warehouse, limiting throughput). If a tenant struggles to hire or must pay overtime, their margins shrink – which could lead them to consolidate locations or renegotiate rents. Properties heavily reliant on a single industry’s supply chain should also be assessed: e.g., an auto-parts warehouse in an area where automotive production is slowing may see inventory cutbacks that reduce space needs. Another consideration is logistics cost pass-through: locations further from end consumers or suppliers incur greater transport costs; if fuel prices spike, a tenant might prioritize closer facilities to cut costs, potentially vacating distant ones. Conversely, assets in locations that save tenants money (shorter delivery routes, access to cheaper labor pools or lower taxes) give owners more pricing power. Location-specific cost factors (like higher electricity costs for cold storage facilities, or higher property taxes in certain municipalities) can also affect net occupancy cost for tenants and should be factored into underwriting as potential stress points. In essence, evaluate how sensitive the tenant’s business model is to external cost swings – the less sensitive (or the more mission-critical the location), the safer the rent stream. When modeling cash flows, it may be wise to incorporate slower rent growth or higher vacancy in scenarios where labor/logistics inflation runs hot and tenants push back.
Lease Structure and Pass-Throughs: Industrial leases often have features like annual escalations and triple-net structures that pass on expenses. These can be strong mitigants if used well. From an underwriting standpoint, ensure the escalation clauses (typically 2–3% annually or tied to CPI) are sufficient to at least keep up with inflation – especially important in a high inflation environment. Cap rates can be defended in part by demonstrating that NOI will grow over the hold period via built-in bumps. Triple-net (NNN) leases, where tenants cover taxes, insurance, and common area maintenance, are standard in bulk and mid-box deals and protect the owner’s NOI from expense risk. However, small multi-tenant properties might have modified gross leases or shorter terms that expose the owner to expense volatility and more frequent downtime. Lenders should adjust underwriting for these differences: a NNN-leased portfolio with 3% bumps is inherently lower risk (and value more defensible) than a portfolio of short gross leases with static rents. Additionally, consider replacement lease assumptions: if a tenant leaves, current market rent might be higher (good for upside) or lower (risk for over-market leases). Properties that had leases signed at 2021 peak rents could face rent roll-down at renewal if market rents have since softened; this is an underwriting risk for income continuity. Analyzing in-place rents vs. market (rent roll analysis) is crucial – any large gap should be accounted for in exit valuations (e.g. if a tenant is 20% above market rent, a buyer at exit might underwrite a vacancy or rent decline, affecting exit cap).
Exit Liquidity and Cap Rate Buffers: Finally, a strategic risk to highlight is exit strategy in a higher cap rate environment. If a lender is underwriting a 5- or 7-year loan, consider what the exit cap rate might be when the sponsor sells or refinances. Given the current 6%-range cap rates, it’s prudent to build in some cushion (e.g. assume an exit cap 50 bps higher than entry) in case interest rates remain elevated or market sentiment weakens. Industrial has benefited from a liquidity boom, but as volumes have dropped (2023–2024 sales were down sharply from 2021 highs), selling large assets or portfolios may take longer. Class segmentation matters here: small-bay assets, with their smaller lot sizes, have a broad buyer pool (individual investors, local owners, in addition to institutions pivoting to that space). Thus, they may maintain better liquidity even in a down market. Huge single-tenant logistics centers, conversely, rely on big institutional buyers or REITs – if capital from those players dries up, exits can be challenging. Underwriters should question the sponsor’s exit assumptions: Are they counting on cap rate compression or a syndication to less yield-sensitive buyers? It’s safer to assume cap rate stability or slight expansion and require the deal to pencil under those conditions. If everything has to go right (low exit cap, flawless lease-up, high rent growth) to meet the pro forma, the risk is high. The best defense for cap rates is strong NOI growth – so focus on properties where NOI can realistically grow via lease-up, rent steps, or improvement of under-market leases. That will cushion value even if cap rates stay where they are or rise.
In summary, today’s underwriting calls for both caution and nuance. Industrial real estate remains a favored asset class, but the variances by sub-type and market are wider than ever. A one-size-fits-all approach (such as assuming 95% occupancy and 3% rent growth across the board) is no longer tenable. By drilling into localized supply trends, tenant credit dynamics, and cost sensitivities, lenders can better isolate risks and structure loans that withstand a range of outcomes.
Five Key Takeaways for Lenders and Investors
Embrace Infill and Last-Mile Strength: Small-bay last-mile warehouses are demonstrating superior occupancy and rent resilience. Their ~5% vacancy and diversified tenant demand make them relatively defensive against downturns. Lenders should view well-located infill industrial as lower-risk – these assets can better defend cap rates due to scarcity and steady rent growth. However, account for higher management needs and shorter leases (e.g. budget for rollover downtime, though note that small spaces re-lease in a fraction of the time of big spaces – often under 5 months vs over a year for big boxes).
Apply Cap Rate Buffers to Bulk Assets: For large single-tenant or bulk distribution deals, underwrite conservatively on exit cap rates. The days of 4.5% cap deals are gone for now – assume exit caps in the high-6% if interest rates remain elevated. Cap rate expansion has already occurred (~150 bps so far), and while industrial yields may compress again if inflation and rates recede, it’s safer to bake in a buffer. Ensure the deal still makes sense with a modestly higher cap, and focus on NOI durability (long leases or strong rent escalations) to guard value.
Be Realistic on Lease-Up Velocity: Temper assumptions about how fast new or vacant space will lease, especially for mid-box and big-box properties. Recent data shows larger vacant blocks can sit for 12–18 months or more before securing tenants. If you’re financing a spec development or a value-add with significant vacancy, use absorption periods in underwriting that reflect current tenant cautiousness (perhaps double the pre-2020 time). It’s better to err on the side of slower lease-up and be positively surprised. For pre-leased construction, scrutinize the remaining spec portion – if only 50% is pre-leased, do the sponsors have the carry capacity if the rest takes a year+ to fill?
Scrutinize Tenant Quality and Downside Scenarios: Cap rate defense in this sector comes from income stability. Dive into tenant financials and industry outlooks. A building full of e-commerce startups or volatile commodity traders carries far more risk than one anchored by an essential goods supplier. Build downside scenarios: What if the largest tenant (or several small ones) vacate? Does the submarket have depth to backfill and at what rent? If a tenant is paying above-market rent today, underwrite a mark-to-market decrease at renewal. Essentially, don’t just trust current rent rolls at face value – perform tenant risk stratification and assume some frictional vacancy over the loan term. This will inform appropriate loan-to-value and debt service coverage buffers.
Focus on Flexibility and Optionality: Given the uncertain trajectory of the economy and logistics sector, assets (and loans) with flexibility will fare best. For assets, this means properties that appeal to multiple tenant types and can physically accommodate division or expansion (for instance, a mid-box warehouse that can be split into smaller units if large tenants are scarce). Such flexibility broadens the leasing prospects and exit buyer pool. For loans, structure in options like extension periods or future funding for tenant improvements – this helps sponsors navigate unforeseen leasing challenges without defaulting. Encourage or require borrowers to have interest rate hedges or cushions, as industrial cap rates and values are rate-sensitive. The goal is to allow breathing room so that short-term market dips don’t force a sale at a bad time. By aligning loan terms with the asset’s lease profile and the market cycle (e.g. avoid loan maturities right when a major lease expires or a glut is peaking), lenders can improve the odds of full repayment.
In conclusion, the industrial & logistics real estate sector is transitioning from an extraordinary boom to a more mature, normalized phase. Cap rates are no longer one-size-fits-all; they are moved by throughput, coverage, and location nuances as much as by macro trends. Lenders and investors who internalize these differences – and underwrite with a strategic, data-driven approach – will be best positioned to capitalize on opportunities while mitigating risks. Industrial remains a cornerstone of the modern economy, and with prudent strategy, it can continue to deliver strong, stable returns even as the market recalibrates.
October 20 2025, by a collective authors of MMCG Invest, industrial feasibility study consultants.
Sources: MMCG Industrial Research Database corebridgefinancial and market reports compiled from CoStar, IBISWorld, and industry publications.
Comments