The yield line says 8.9 cap, but nobody else can use the building
Working through a deal that looks great on the yield line and worse the longer I sit with it. 34,000 sf, built 1978, 18 foot clear, one dock door and one drive-in, town of about 6,500 people, nearest interstate is 22 miles. Tenant is a plastics fabricator, six years left at $3.75 psf NNN with 2 percent bumps. Ask is $1.42M, so 8.9 going in.
The problems stack up. The appraiser I spoke with said he'd have to reach 80 miles to find three sales, and two of them were owner-user purchases rather than investment trades, which means my exit cap is a guess with a wide error bar. Lender is quoting 25 percent down on a 20 year amortization with a full recourse guarantee and a five year balloon, so I'd be refinancing into whatever this building appraises for with three years of term left. The reshoring and data-center demand everyone points to as the industrial tailwind is not showing up in a county this size, at least not that I can find in any absorption data.
What I keep coming back to is that the residual here is the land and the slab. Eight acres of light industrial ground in that county trades around $25k to $30k an acre, so call it $220k if the building goes dark and nobody wants 18 foot clear. That's a 15 cent recovery on the dollar in the bad case, which means the whole thing is a bet on one fabricator's order book for six years.
The 8.9 starts to look like it's paid for exactly that and nothing more. I'd hold this forever if the tenant stayed forever, which is a sentence that should worry me...