Underwriting three small bay industrial deals in SW Florida: 6 cap vs 7 cap, absolute NNN with a PG, and the one we walked on
We run a South Florida CRE investment company and we film our deal tours, so the numbers below are from a real day of looking, mistakes included. Everything you need is in this post.
We drove from Margate to Fort Myers to look at three industrial properties in one day. All three came off broker email lists, none were marketed hard, and we bought zero of them. That is a normal day. Most cap rate discussion stays theoretical, and the interesting part of commercial real estate underwriting is where the math and the physical building disagree.
PROPERTY 1: 5,300 SF metal building, $84K NOI, $1.35M ask
Going in that is a 6.2 cap and about $255 per square foot. I said $270 a foot at the time, which assumed 5,000 SF. It is 5,300, so $255. Correcting it because the difference matters at this size.
The question is not whether 6.2 is a good cap rate in a vacuum. It is what the capitalization rate should be for this specific box. It is a metal building, not masonry, in a submarket where I underwrite small bay industrial at a 7 to 7.5. At a 7 cap that building is $1.2M. At 7.5 it is $1.12M. So the ask is $150K to $230K above where I can get there, and that spread is not a negotiation, it is a different view of risk.
This is the thing I would tell anyone learning how to calculate cap rate: NOI divided by price is thirty seconds of work. Deciding what cap rate the asset deserves is the entire job.
PROPERTY 2: 10,200 SF, brand new, 10 year absolute triple net with 4% annual bumps, no ask price
Rent is $16 per foot. 10,200 x $16 = $163,200 NOI. Broker would not put a number out, but the number floating around was $3M.
Run it. $163,200 divided by $3M is a 5.4 cap, not a 6. I called it a 6 in the moment and I was wrong. A 6 cap on $163,200 is $2.72M. That is a $280K difference on a mental math error, which is why you do not negotiate off a number you did the arithmetic on in a parking lot.
At $3M you are paying roughly $294 per square foot on a building that costs somewhere near that to replicate. You are not buying a discount to replacement cost. You are buying a lease.
Which brings up the part I actually want to argue about. Absolute NNN with personal guarantees gets quoted like it is a credit rating. It is not. Absolute triple net means the tenant carries roof, structure, taxes, insurance, and maintenance, so your NOI is close to your net cash flow and you are underwriting a bond wrapped in a building. Fine. But a personal guarantee is only worth the balance sheet behind it. A PG from an operator with no liquidity is not credit, it is a lawsuit with extra steps. If you are paying a 5.4 cap for lease structure, you had better have pulled the guarantor's financials before you priced it that way.
The 4% annual bumps are the part I do like. $163,200 growing at 4% is $232,300 in year 10, so at a $3M basis your yield on cost goes from 5.4% to 7.7% without a single thing improving about the real estate. That is the whole argument for accepting a low going in yield, and it is also the argument that falls apart the second the guarantor does.
PROPERTY 3: 25,000 SF, three buildings, 23 grade level doors, seller claims about $38K a month
Call it $456K of claimed annual income. Emphasis on claimed. That is the seller's number and we did not verify it on site.
We walked. Not on price, on tenant profile. Twenty three grade level doors across three buildings means a lot of small users, short leases, and a rent roll that turns constantly. On a spreadsheet that is diversification. In practice it is a management job priced as a passive investment, and the credit behind that income does not support the cap rate that income implies.
Biggest deal of the day, worst deal of the day.
THE RATIO NOBODY PUTS IN THE PITCH DECK
Ninety percent of what you look at, you do not buy. Three properties, a full day of driving, zero LOIs. New people treat a pass as a wasted day. It is not. The passes are what build the comp set that lets you price the next one in ten minutes instead of ten days.
WHERE I WANT PUSHBACK
1. On sub 15,000 SF industrial in secondary Florida markets, what is your actual going in cap rate right now, and how much are you spreading metal versus masonry construction?
2. How do you underwrite a personal guarantee? Do you actually pull guarantor financials at this deal size, or does the PG just function as a tiebreaker?
3. At what point does a long absolute NNN lease with 4% bumps justify buying at or above replacement cost per square foot? Where is your line?
4. For anyone who has taken down multi tenant small bay: is the management drag real enough that you underwrite a separate cap rate premium for it, and how many bps?
Happy to go deeper on any of the three in the thread.
