What is mark-to-market rent in an industrial underwriting model?

It's the gap between a tenant's in-place contractual rent and current market rent for comparable space, expressed as a percentage spread. On long-WALT single-tenant deals this spread is often the primary source of value creation, but it only converts to cash flow at lease rollover, not before.

How does tenant credit rating affect debt sizing on single-tenant industrial?

Because there's one tenant, the DSCR floor a lender applies is set largely by that tenant's credit rating. Investment-grade tenants typically clear a lower DSCR floor (around 1.25–1.35x); non-rated or sub-investment-grade tenants require a higher floor, which directly reduces maximum loan proceeds.

What happens to NOI if a single-tenant industrial lease doesn't renew?

NOI drops to zero until a replacement tenant is signed, minus any holding costs and the reserve for downtime and re-tenanting TI/LC. This is why single-tenant models need an explicit downtime assumption at rollover rather than assuming seamless renewal.

What clear height do institutional industrial buyers require in 2026?

Modern logistics and e-commerce tenants generally require 32'+ clear height, ESFR sprinklers, and expanded trailer parking. Buildings below that spec face functional obsolescence risk that should widen the exit cap assumption, not just discount current rent.

What is a real estate underwriting model?

A structured spreadsheet that projects a property's cash flow, financing, and returns under explicit assumptions — the basis for every institutional acquisition decision.

Industrial · Underwriting Model

Industrial Underwriting Model

How to build an industrial underwriting model: single-tenant NNN revenue, mark-to-market on rollover, credit-driven debt sizing, rollover downtime. Free.

Get the Excel template Automate it with Moraine

Why the underwriting model looks different for industrial

Single-tenant industrial revenue is nearly pure NNN pass-through, so the model's real work is the mark-to-market gap between in-place rent and current market rent, and quantifying what happens to that gap at rollover rather than only at signing.

A single tenant's credit rating sets the DSCR floor for debt sizing: investment-grade tenants clear a lower floor than non-rated ones, a distinction most asset classes with diversified rent rolls never carry into the debt model.

Because there's one tenant, rollover is a single binary event with real downtime and re-tenanting cost, modeled explicitly at the lease expiration date instead of smoothed into an average.

The industrial-specific checklist

1

Build the rent roll

Verify: unit- or tenant-level detail with rent, term, recoveries
2

Project market rent growth

Verify: submarket-specific; avoid flat nationals assumption
3

Model recoveries explicitly

Verify: CAM, tax, insurance broken out, not blended
4

Run sensitivity on exit cap

Verify: ±75 bps and stress the downside
5

Build debt sizing

Verify: LTV and DSCR constraints both checked
6

Compute leveraged IRR and equity multiple

Verify: cash flow to equity, not enterprise
7

Confirm clear height, column spacing, and dock door count against backfill-tenant specs

Verify: specs meet current e-commerce/3PL demand standards (32'+ clear height, ESFR sprinklers) for the submarket
8

Build the mark-to-market gap from verified comps

Verify: comps within 3 miles and 12 months of the valuation date
9

Set the DSCR floor off the tenant's actual credit rating

Verify: investment-grade vs. non-rated tenant modeled at different DSCR floors, not a single blanket assumption
10

Reserve for roof and structural capex off an engineering report

Verify: reserve sized to the property condition assessment, not a blanket $/SF assumption
11

Model rollover downtime and re-tenanting TI/LC explicitly at lease expiration

Verify: downtime assumption stated in months and cross-checked against submarket absorption data
12

Stress-test the model against a tenant credit downgrade or dark-but-paying scenario

Verify: downside case shows the DSCR impact if the tenant is downgraded below investment grade mid-hold

Metrics that matter for industrial

Metric	Target	Calculation
Mark-to-market spread	>15%	(market rent − in-place rent) / in-place rent
Debt yield	>9%	Year 1 NOI / loan amount
Rollover downtime reserve	<6 months of rent	TI + LC budget / annual rent at rollover
WALT (yrs)	>5 for core, >3 for value-add	weighted avg remaining lease term
Mark-to-market	>0%	(market rent - in-place rent) / in-place rent
Clear height (ft)	>32 for modern logistics	building clear height

Red flags unique to industrial

Mark-to-market gain assumed to convert to cash flow with no downtime or re-tenanting cost

the spread between in-place and market rent only materializes after the existing lease actually expires and a new tenant signs, ignoring the gap between those events overstates near-term cash flow
Non-investment-grade single tenant underwritten at the same DSCR floor as an investment-grade tenant

credit risk on a single-tenant asset is concentrated in one counterparty, treating both credit tiers the same understates the debt-service cushion the deal actually needs
Functional obsolescence (clear height under 28', insufficient trailer parking) ignored in the exit cap

modern logistics tenants increasingly require 32'+ clear height and expanded trailer courts, a building that can't meet that spec faces a wider buyer pool discount at exit that a flat exit cap doesn't capture
Short-notice termination right within option period

re-leasing at market-down-cycle timing is the main scenario that breaks industrial underwriting
CPI escalator capped below 2%

inflation erosion over a 10-year hold
Tenant credit below investment grade without guaranty

NNN economics rely on tenant credit — no guaranty means no backstop
Mark-to-market gap below 0%

in-place rents above market suggest re-leasing risk at renewal

Example — industrial underwriting model walkthrough

Start with a 425,000 SF single-tenant distribution facility in Memphis priced at $36.55M, $86/SF. The tenant, an investment-grade 3PL, pays $5.35/SF NNN with 6.2 years remaining on the lease. Because the lease is NNN, gross potential rent of $2,273,750 passes through almost entirely; the landlord retains a $0.15/SF roof and structural reserve ($63,750) and a 2% management fee ($45,475), leaving Year 1 NOI of $2,164,525, a 5.92% going-in cap rate. The roof and structural reserve stays with the landlord because this lease's capital allocation keeps roof and structure outside the NNN pass-through.

Most of the underwriting lives in the mark-to-market gap. Verified comps within 3 miles and 12 months show current market rent at $6.90/SF NNN, a 28.97% spread over the in-place $5.35/SF. That spread doesn't convert to cash flow until the lease actually rolls; the model has to hold in-place rent flat through Year 6 and only step to the new rate at rollover, not blend the gap in early.

Debt sizing reflects the tenant's investment-grade credit: a 1.35x DSCR floor against $2,164,525 of NOI implies $25.4M of proceeds at a 6.3% constant, but 60% LTV caps proceeds at $21.93M, so LTV binds; the credit quality is what allowed the DSCR floor to sit low enough for LTV to be the tighter constraint. A non-rated tenant on the same NOI would need a higher DSCR floor, likely flipping which constraint binds.

At rollover in Year 7, the model assumes the tenant renews at the market rate of $6.90/SF, generating $2,932,500 of gross rent against a modestly higher reserve and fee load, for NOI of $2,810,100. Because the fresh long-term lease de-risks the credit profile, the exit cap compresses 25 bps below entry to 5.67%, producing a terminal value of roughly $49.6M. A real model also carries an explicit downtime and re-tenanting cost for the case where the tenant does not renew; a single-tenant asset has no other income to absorb that gap while a replacement is found.