Marking rent to market on a 2005 box while vacancy is still climbing

Question

Seller of a 78,000 sf single tenant building is underwriting a full roll to market and I can't make the math sit still. In-place is $4.85 psf NNN with three years left, 26 foot clear, four dock doors per 10,000 sf, 120 foot truck court. Submarket asking on comparable second-generation space is $7.40, but every broker I talk to admits deals are trading with four to six months free plus a landlord work letter.

At roughly $378K of NOI, $4.85 psf on 78,000 sf, the ask is a 7.1 going-in, call it $5.3M, about $68 a foot. Their year four stabilized number gets to 8.4 on the strength of that roll. My problem is the timing. If vacancy in this metro peaks mid-2026 and new 36 foot product is still delivering into it, the incumbent tenant knows exactly how much negotiating room they have at renewal. I've been holding land for years and I'm used to underwriting nothing happening, so a three-year lease that carries the whole exit story feels like the opposite of that.

How much do you actually haircut a mark-to-market like this, and do you model renewal at a discount or model downtime plus TI and re-leasing? Those two paths give me values about $1.2M apart on the same building.

Rena Expert · Accepted Answer

Convert the $7.40 to net effective before you do anything else. Five months free on a 60-month term is roughly 8 percent off face, and $2.00 psf of TI amortized over the term at 8 percent is another 45 to 50 cents. You're at $6.30 to $6.40 effective, not $7.40. Seller's stabilized 8.4 is really closer to 7.3 on the same assumptions, which is a much less interesting spread over the going-in.

On the physical side, 26 foot clear is not the constraint you think it is for tenants under 100,000 sf. The 120 foot truck court is. Modern 53 foot trailer maneuvering wants 130 feet plus a 60 foot apron, and if you're short of that you're competing for regional distribution and light assembly users rather than anything doing high trailer volume. That narrows your renewal pool, which argues for modeling a renewal at a discount rather than a clean roll to market. I'd underwrite the incumbent renewing at $5.75 to $6.25 with modest TI, and run a downside case with nine months of downtime, $3.50 psf of TI and a 50 cent leasing commission drag.

The piece that will bite you before any of this resolves is loan structure. A lease expiring inside the loan term usually draws a cash sweep or a re-leasing reserve, and some lenders size the loan on the darkened value rather than in-place NOI. Get the sizing and the sweep triggers in writing from the lender before you spend money on third-party reports. Also check how the county reassesses on transfer, because that varies by state and a reset can move your NNN recovery calculation and the tenant's total occupancy cost at exactly the moment you're asking them to renew.

karen_whitfield · Answer

I'd take the renewal case over the downtime case almost every time on a building like this. A tenant who has spent 20 years fitting racking, power and a spray line into 26 foot clear does not casually move to a 36 foot building at $7.40 and eat the relocation. My number would be $6.00 flat with zero TI and a two-month gap for paperwork. If that still clears your return, the deal works. If it only works at $7.40, you're buying the broker's spreadsheet.

aaron_fitz10 · Answer

120 foot court with four doors per 10,000 sf is a light industrial building wearing a distribution costume.

Marking rent to market on a 2005 box while vacancy is still climbing

3 replies