Despite some headwinds, industrial will still be a hot property type this year due to strong fundamentals and continued growth potential. Industrial has long been the darling of the industry, however; leasing velocity has slowed and changes in tariffs have softened demand and sales. Construction financing will tighten unless backed by strong sponsorship and ample pre-leasing, especially as overbuilding creates softness in some markets. Amazon also keeps changing its need for space, which is causing some unknowns. All lender types will remain active, although count on more overall scrutiny going forward.
Borrowers will see leverage reach 70% to 75% for deals with higher rates. Most deals will be in the 60% to 65% range and loans with lower pricing will see sub-60% leverage. Construction leverage is generally in the 55% to 60% LTC range. Lower-leverage deals and properties with strong cash flows will see low 5% rates. Moderate leverage loans will gain mid-5% rates, while higher leverage will price up to the low 6%. Construction loans are generally pricing between 2.50% and 4% over one-month term SOFR. DSC will be 1.25x to 1.35x. Debt yield will be 8.5% to 9.5%+.
Banks such as Wells Fargo, Goldman Sachs, U.S. Bank, Comerica, BMO, Fifth Third Bank, Texas State Bank, Synovus, City National Bank, Axos Bank, M&T Bank, Bank Hapoalim, Byline Bank, Ocean Bank, Fidelity Bank and Banc of California will fund deals. Banks will offer 65% to 70% leverage. CMBS lenders such as Citi, Deutsche Bank, Morgan Stanley, Natixis, Argentic and KeyBank will also strive to compete. Wells Fargo, JP Morgan and Goldman Sachs will be active with SASB loans. Life companies including PGIM Real Estate, New York Life, MetLife, Thrivent, Nationwide, PPM, Aegon Asset Management, Manulife, TruStage and Farm Bureau Insurance will fund deals with strong projects and sponsors. Borrowers will see 65% maximum leverage. Life companies continue to offer the most competitive pricing on stabilized deals, with spreads starting around 135 basis points over the Treasury.
Lenders will not be as speculative in underwriting as they have been in the past few years. Expect them to shift away from proforma rent growth and focus more on in-place income and tenant quality. Underwriting is more focused on downside protection, not just projected upside. Lenders are putting added weight on tenant credit, rollover timing and sponsor experience. The cost per square foot is a key metric, and lenders want to ensure loan basis aligns with sales comps and replacement cost. If the basis feels stretched, the deal becomes a tougher sell. Increases in insurance and other line items could cause some issues. Borrowers need to have a good reputation in the leasing community.
Well-located Class A and B assets in strong infill or growth markets will be targeted, with shallow-bay product in high demand due to tenant diversity and flexibility. Newer multitenant industrial buildings with state-of-the-art amenities and loading docks will also be sought after. Legacy infill assets are gaining traction where value can be created through leasing or repositioning. Properties that can be broken up into several pieces will be sought after. Institutional-credit tenants such as logistics, e-commerce and food companies are preferred for their durability. Properties with single tenants, functional obsolescence or exposure to soft markets are seeing more pushback. Big-box product in secondary markets will face more scrutiny, especially where rollover risk or tenant depth is a concern. Count on lenders to highly scrutinize the tenant in a single-tenant deal, especially if the tenant is not investment grade. Riskier sectors such as cannabis or early-stage manufacturing also tend to raise flags, especially when financials are limited.
Location will be critical and those within a short drive of a port or major railway will be desired. Markets such as Dallas/Fort Worth, Phoenix, Tampa, Fla., Maimi, Salt Lake City, Nashville, Tenn., and California’s Inland Empire remain highly active due to population growth and logistics infrastructure. Also, look for a pickup in activity in Detroit. Markets where speculative development has outpaced absorption, such as Indianapolis, Las Vegas and some Midwest metros are seeing more hesitation. Lenders are waiting for leasing to catch up before re-entering those markets aggressively.
