Investors are chasing yield in the Industrial Service Facilities sector

Spread over Class B cap rates are narrowing as rents roll to market

June 27, 2022


Nicholas Rita

Fundamentals matter

Highly fragmented and underexposed to capital, the industrial service facilities sector has been slow to institutionalize. With an average deal size of under $10 million, the opportunity to appropriately scale has eluded investors. However, the favorable dynamics of these assets has put them back into focus, as they are experiencing a similar trajectory to that of the broader industrial sector, where strong tenant demand and limited supply drove consistent rental growth.

Sector offers notable yield premium

Depending on the market, cap rates for these facilities are trading up to 75-basis points over your traditional Class B warehouse, with an additional 75 to 100-basis points for entitlement and leasing risk. With new capital targeting the sector and unprecedented barriers to new supply preserving property fundamentals, the outlook for pricing continues to be strong notwithstanding broader market volatility.