Knowing how to underwrite an industrial deal is not knowing how to build a proforma. The model is the easy part. The hard part is calibration — and most analysts calibrate to the wrong number because they start with square footage. A 120,000 SF building is not a unit of value. A 120,000 SF building with 24-foot clear, four dock doors, and a 90-foot truck court is a different asset than the same footprint with 32-foot clear, cross-dock loading, and 130 feet of court depth. Underwrite the first as if it were the second and you have anchored to a rent the market will never pay.
This is the sequence a professional follows on a live deal. Do it in order. The order is the discipline.
Calibrate the functional comps before you touch the rent roll
The first input is not rent. It is the building's functional spec, because that is what sets the rent. Pull the comp set on the physical characteristics that drive tenant demand, not on price per foot in isolation. The fields that actually move rent:
- Clear height — the single most important spec. The market bifurcates hard around 28–32 feet. A 22-foot-clear building competes for a shrinking tenant pool and rents at a discount that widens every year.
- Dock configuration — door count relative to size, dock-high vs. grade-level, and whether loading is single-sided or cross-dock. A low door-to-SF ratio caps the tenant universe to low-throughput users.
- Truck court depth — under roughly 120 feet and modern distribution tenants cannot maneuver 53-foot trailers. This is a hard functional gate, not a preference.
- Power — available amperage and whether the panel supports an upgrade. Light-industrial and manufacturing tenants screen on this before they screen on rent.
- Trailer parking and car parking ratios — capacity here determines whether a logistics user can even tour the building.
Only after you have matched the subject to comps on these specs do you have a defensible market rent. Skip this and the entire model inherits a bad anchor. This is the discipline that separates real industrial underwriting from filling in a template.
Build the rent roll, then mark it to market
With a calibrated market rent, build the in-place rent roll lease by lease. For each tenant capture the in-place base rent, escalations, expiration, renewal options, and the reimbursement structure — net, modified gross, or full service. Then do the step juniors skip: flag every lease against market.
- Below-market in place — a tenant paying $6.50/SF in a $9.00 market is embedded upside, but only if you flag it and model the mark-to-market at expiration. Straight-lining that rent through the hold buries the upside and understates value.
- Above-market in place — the more dangerous case. A tenant at 1.00 in a $9.00 market is a rollover loss waiting to happen. Underwrite the roll-down, not the in-place number.
- Reimbursement leakage — confirm what the lease actually passes through. A "NNN" deal with capped CAM or landlord-retained structural obligations is not fully net, and the expense recovery line has to reflect that. Pull this from a clean lease abstract rather than the broker's summary.
Stress the near-term rollover
The proforma's first three years are where deals break. Isolate every lease expiring inside the hold and pressure-test the assumptions: downtime between tenants, tenant improvement and leasing commission costs at current market, and the realistic re-lease rent — not the asking rent. On a single-tenant industrial building, one expiration in year two is the entire risk profile of the deal. The principle holds across asset classes; the mechanics mirror what we cover in how to underwrite a net-lease acquisition, where rollover timing dominates the return.
Size the debt to DSCR and LTV — the binding one wins
Build the financing off both constraints and let the tighter one govern:
- LTV — the lender's loan-to-value ceiling against appraised or purchase value.
- DSCR — debt service coverage on in-place net operating income, typically 1.25x or higher for industrial.
- Debt yield — NOI over loan amount, the lender's check that ignores cap rate and interest rate noise.
Size to all three and take the lowest proceeds. In a higher-rate environment DSCR usually binds before LTV, which means the deal is smaller than the seller's pricing assumes. Model both an interest-only period and amortizing service so the cash-on-cash story is honest from day one.
Set the exit cap to market depth, not portfolio average
The exit cap is the highest-leverage assumption in the model and the most abused. Set it to the depth of the buyer pool for this building in this submarket — not a blended portfolio average, and not a round number that makes the IRR clear the hurdle. A functionally modern, 32-foot-clear building in a deep distribution market exits to a different buyer pool, and a different cap, than a 22-foot-clear infill building with a shallow court. Expand the exit cap relative to entry on any asset carrying functional obsolescence; that spread is the market pricing in the same risk you flagged in step one.
Where principal review catches what the model misses
A model can foot perfectly and still be wrong. These are the oversimplifications a junior analyst reliably introduces, and the reasons every model gets a second read before it leaves:
- Straight-lining a below-market lease with no mark-to-market flag — the value is real but invisible in the cash flows, so the deal looks fairly priced when it is actually cheap, or the reverse on an above-market roll-down.
- Ignoring functional obsolescence on low-clear buildings — the model rents a 22-foot building at market and assumes it holds. The market does not. Each renewal cycle the tenant pool thins and the discount deepens.
- Applying a blended exit cap where a market-specific one is required — a portfolio average exit cap quietly manufactures basis points of return that the actual buyer pool will never pay.
None of these are math errors. They are judgment errors, which is exactly why an outsourced CRE analyst who has seen the failure modes catches them faster than a junior building their first dozen models. The sequence above is what we hold every industrial acquisition proforma to, and the assumptions feed straight into the investment memo that goes to the committee. Run it the same way every time and the discipline compounds — one schema, one set of flagged assumptions, every deal comparable to the last. That consistency is what turns an accurate model into a useful one. The underwriting toolkit gives you the field set to start.
Need this on a live deal? Capistrano produces underwriting, lease abstracts, investment memos, and capital-raise materials — AI-leveraged, principal-reviewed.