Selecting an Appropriate Capitalization Rate – Industrial Real Estate

In 4th quarter 2012, completed an actual, not pro forma Capitalization Rate of Return Market Sale Study for Industrial Real Estate in Southern California. 

Issue: An investor buyer client was weighing several purchase opportunities in the Los Angeles area for consideration, already owned industrial product and was comfortable with this property type outside of the area. However, the prospective buyer did not already own any real estate in the area and wanted to understand true market level rates of return so that the ultimate selected property purchased was not over paid for in today’s market and to make an informed decision. 

Solution: Research, analysis & conclusion of sale comparables that were sold in 2012 throughout Southern California, approximate ranges: 

# of Sales Comparables: 10+ 

4 County Locations: Orange, Los Angeles, Riverside & San Bernardino 

Specific Uses: Light Manufacturing, Warehouse, Flex & Distribution 

Building Size: 10,000 SF to low 600,000 SF 

Year Built: 1970’s to 2006 

Credit: Local, Regional & National 

Overall Actual Capitalization Rate Range: low 5% to mid to upper 7%, Actual Average of 6.6% 

There was less than a 300 basis point spread, variance was due to many factors, below are the major ones: 

Strength of the Tenancy - National vs. Local Credit, Single vs. Multiple Tenants 

# of Years Remaining on the Lease(s)/Annual Base Rent Increases/Additional Common Area Maintenance (CAM’s) Expenses 

Was Contract Rent being paid by the tenant(s) Below, At or Above Market Rent Levels? 

A detailed Income Approach with a current Market Rent Study that includes the most recent completed, just leased Rent Comparables with detailed transaction details and concessions to obtain true net effective rent should always be done as a test to the Sales Comparison Approach for purposes of analyzing Owner User vs. Investor Value buyer motivation. 

Since the recent height of the market in 2005 to 2007, lease rates have dropped considerably relative to sale prices which has resulted in Industrial Real Estate sale price premium spreads that are typically 30%+, typically much higher in comparison to general Commercial Real Estate (Retail, Office, etc.) differentials. 

Helping clients make the best Real Estate Investment decisions from numerous options, providing Southern California Commercial Real Estate Valuation/Appraisal Consulting and Los Angeles County Commercial Property Sales & Leasing Brokerage.