Industrial has been the CRE sector everyone wanted to own for the past five years, and now it's the sector everyone has to think harder about underwriting. The conditions that drove the industrial boom — persistent cap rate compression, strong rent growth, long lease terms from creditworthy logistics tenants — are giving way to a more complicated picture. We're seeing it directly in how deal teams are modeling acquisitions, and it requires adjustments to standard assumptions that most underwriting models weren't designed to handle.
Cap Rate Compression: Where We Are and What It Means for the Model
Industrial cap rates at market peak in 2021-2022 compressed to ranges that felt justified by rent growth but left little room for error. In core logistics corridors — infill Southern California, the New Jersey port complex, core Dallas — institutional-quality industrial traded at 3.5-4.5% cap rates. In 2024-2025, those same submarkets have seen cap rates soften back to the 5.0-5.8% range as rate normalization has worked through pricing. Secondary markets have seen wider movement, with some Sun Belt industrial submarkets repricing from 4.5-5.0% to 6.0-6.8% over 18 months.
What this means for underwriting: the going-in cap rate has to reflect current market pricing, not the peak comp from two years ago. This sounds obvious, but in practice, it's the most common error we see in industrial underwriting models submitted for IC review — a going-in cap rate that reflects transactions from 12-18 months prior, which produces an acquisition price that the current market simply won't support. The delta between a 5.0% and a 6.0% cap rate on a $2M NOI building is a $6.7M difference in valuation. That's not noise.
The exit cap rate assumption requires equal care. Models that assumed 3.5-4.0% exit caps in 2021 and used that to drive IRR calculations now need a more conservative assumption. We've seen teams using exit cap assumptions 75-100 basis points above the going-in cap rate as a reasonable forward buffer, depending on hold period and market location. That spread needs to be explicit in the model and defensible at IC — not a number chosen to make the IRR work.
The Lease Term Compression Problem
The other structural shift in industrial underwriting is lease term. Through the supply-constrained years of 2020-2022, landlords could routinely achieve 7-10 year lease terms with creditworthy logistics and e-commerce tenants. In 2024-2025, the market dynamic has flipped in many submarkets. New supply has increased in markets like Phoenix, Dallas, and the Inland Empire, vacancy has risen from sub-2% to 5-7% in some corridors, and tenants are using that negotiating position to push for shorter terms.
We're now seeing 3-5 year initial terms as the norm in several Sun Belt industrial submarkets, compared to 5-7 year norms two years prior. That term compression has direct underwriting consequences:
- Higher rollover frequency. A portfolio of 3-year leases means the entire tenant base rolls approximately every 3 years, creating more frequent periods of vacancy risk and re-leasing cost. The TI/LC reserve assumption in the model needs to reflect this higher rollover velocity.
- Reduced WALT at acquisition. Properties acquired with shorter initial lease terms have compressed WALTs that price in additional risk at exit. A Class A distribution center with a WALT of 2.8 years looks very different from an equivalent asset with a 6.5-year WALT, both on debt coverage and on cap rate from a buyer's perspective.
- Greater sensitivity to market rent movements. With shorter lease terms, current in-place rents mark to market more frequently. In a submarket with rising vacancy, that's a risk: the mark-to-market at renewal will be down, not up. In a constrained submarket, it's an opportunity. The model needs to distinguish between these two scenarios, not apply a uniform rent growth assumption.
Rent Growth: The Mark-to-Market Reality
Industrial rent growth has been among the most dramatic stories in CRE over the past several years. In-place rents at many properties acquired in 2018-2020 are 40-60% below current market rents in their submarkets. That mark-to-market opportunity has been a significant thesis driver for industrial acquisitions.
In 2025, that opportunity is partly realized and partly eroded. Properties acquired in 2018 with below-market leases rolling to market rent have captured the upside. Properties still in the hold period are still carrying it. But for new acquisitions at 2025 pricing, the in-place rent relative to current market is much narrower — often just 5-15% below market, depending on vintage of existing leases. The mark-to-market story that justified aggressive pricing two years ago is largely priced in on recently acquired assets.
The underwriting implication is that rent growth assumptions need to be submarket-specific and vacancy-adjusted. Markets with rising vacancy — particularly secondary distribution hubs that saw significant spec construction in 2022-2023 — are facing downward rent pressure on renewals. A model that assumes 3% annual rent growth in a submarket with 8% vacancy and 15 million square feet of new supply coming online in the next 18 months is not an underwriting model; it's a wishful projection.
In our experience, the most common industrial underwriting error in 2025 is applying a market-wide rent growth assumption without adjusting for submarket-specific supply conditions. That adjustment can be the difference between a deal that clears the hurdle rate and one that doesn't.
DSCR at Current Financing Conditions
Industrial acquisitions financed at 2021 interest rates looked very different from the same acquisitions financed at 2024-2025 rates. A deal underwritten at 5.2% cap with 3.5% debt service looked like a reasonable DSCR spread; the same deal with current financing rates in the 6.5-7.5% range for bridge or transitional industrial debt requires either a lower acquisition price, higher NOI, or meaningful equity cushion to achieve acceptable debt coverage.
We've seen several industrial underwriting models submitted for IC review that still carry debt service assumptions from 12-18 months prior. The model showed a 1.35x DSCR that actually came out closer to 1.05x at current financing terms. That's not a viable deal — it's a model that hasn't been updated to reflect current market conditions.
The standard industrial DSCR threshold for senior debt is typically 1.25x minimum, with most lenders wanting to see 1.30-1.35x for stabilized industrial assets. In the current environment, achieving those ratios often requires bringing the acquisition price down to match the cap rate needed for acceptable DSCR at today's debt service rates. Deals that don't pencil at current pricing should be passed on, not modeled at assumptions that don't reflect reality.
What This Means for How You Model Industrial Deals in 2025
At Tenantvein, we've updated our industrial underwriting defaults to reflect these structural shifts. Several specific adjustments we'd recommend for any team actively modeling industrial acquisitions in the current environment:
Use trailing 12-month comp transactions for going-in cap rate support. Don't use 2022-2023 transactions as primary cap rate support for 2025 underwriting. The market has repriced. Your comp set should reflect that.
Model rollover TI/LC at current market rates, not historical rates. TI allowances for industrial renewals have moved up in markets with new supply, as landlords compete for tenants. A $3-5 PSF TI assumption that was reasonable in 2021 may need to be $8-12 PSF in a market with meaningful new inventory. Use your comps database, not memory.
Apply submarket-specific vacancy trajectories. National industrial vacancy averages are not a useful input for individual deal underwriting. A Phoenix distribution submarket with 9% vacancy and 8 million SF of new supply under construction has very different forward vacancy risk than a Southern California infill market with 4% vacancy and no land for new development. Model these separately.
Stress-test exit assumptions at +100-150 bps over going-in cap rate. In a market where cap rates have moved 100+ bps in 18 months, exit assumptions need to be stress-tested accordingly. A deal that requires an exit cap rate compression to generate acceptable returns is not a deal that should close at current pricing.
Industrial CRE remains a fundamentally sound investment category across most US markets. But the free-money era assumptions built into many industrial underwriting models from 2020-2022 need to be retired. The deals that make sense in 2025 will be the ones whose numbers hold up under realistic current-market assumptions — not the ones modeled to hit a return target regardless of what the market is actually doing.
