The Small Bay Industrial Investment Pro Forma: 7 Key Areas for Accuracy and Appeal

 The Small Bay Industrial Investment Pro Forma: 7 Key Areas for Accuracy and Appeal

A well-structured pro forma is critical for evaluating the financial viability of small bay industrial properties. Investors and lenders rely on these projections to assess risk, profitability, and long-term sustainability. Below are the seven essential components that should be included in a small bay industrial investment pro forma.

"Your pro forma isn’t just a spreadsheet—it’s the story of your investment’s future. The more detailed, transparent, and realistic it is, the more confidence lenders and partners will have in backing your deal," says Cody Payne, author of Flex Space Domination.

 

1. Month-by-Month Projections

A detailed month-by-month breakdown provides insight into the expected performance of the property leading up to and beyond stabilization. This level of granularity allows for adjustments based on market trends and lease-up timing.

Key Elements to Include:

• Income Projections: Estimate rental income based on the market rate per square foot and projected occupancy rates. Small bay industrial spaces often cater to a diverse range of tenants, including trade businesses, e-commerce fulfillment centers, and light manufacturers.
• Operating Expenses: Account for property management fees, maintenance, utilities, property insurance, and property taxes.
• Net Operating Income (NOI): NOI is calculated by subtracting operating expenses from gross rental income. This metric is crucial for assessing investment performance.
• Debt Service and Financing Assumptions: Include monthly mortgage payments based on the loan amount, interest rate, and amortization period.
• Vacancy Allowance: Factor in potential periods of vacancy and lease-up times based on market conditions.

Providing explanations for each figure—such as whether it's based on historical performance, vendor quotes, or industry benchmarks—adds credibility to the pro forma.

2. Year-Over-Year Summary

A multi-year summary helps investors and lenders visualize long-term property performance. Typically, this overview spans the loan's balloon term and includes at least two years beyond stabilization.

What to Include:

• Revenue Growth Projections: Account for rental increases and changes in occupancy levels.
• Expense Adjustments: Consider inflation-related increases in operating costs.
• Capital Expenditures: Highlight expected costs for property improvements, such as roof replacements or parking lot repairs.

A well-structured year-over-year summary offers stakeholders a high-level view of the property's trajectory and potential return on investment.

3. Tenant Improvement (TI) Costs

Unlike large industrial warehouses, small bay industrial spaces require minimal buildout, making them attractive to tenants seeking cost-effective solutions. However, some tenant customization may be necessary.

Key Considerations:

• Low Buildout Costs: Compared to office or retail spaces, small bay industrial properties typically require simple modifications like warehouse shelving, office space partitions, or additional electrical outlets.
• Faster Lease-Up: The lower TI costs and flexible layouts often result in quicker occupancy rates.
• Potential for Tenant Contributions: Some tenants may be willing to fund their own improvements in exchange for longer lease terms or rent concessions.

4. Rental Rates and Lease Structures

Small bay industrial properties generally offer competitive rental rates while still maintaining strong income potential.

Key Factors to Highlight:

• Market Rent Comparisons: Show how rental rates compare to other industrial properties in the region.
• Triple Net (NNN) Leases: Many small bay industrial properties use NNN leases, where tenants cover maintenance, property taxes, and insurance. This structure reduces the owner's operating expenses.
• Shorter Lease Terms with Upside Potential: Lease terms typically range from three to five years, allowing landlords to adjust rents more frequently to align with market trends.

5. Market Demand and Occupancy Rates

Small bay industrial properties are in high demand due to their adaptability and affordability.

Demand Drivers:

• E-Commerce Expansion: The need for last-mile logistics and distribution centers is growing.
• Rise in Small Businesses: Trade businesses, contractors, and light manufacturers prefer smaller industrial spaces over larger, more expensive facilities.
• Diversified Tenant Base: A broad range of potential tenants enhances occupancy stability.

Including market data and trends in the pro forma strengthens the investment case.

6. Supply Constraints and Development Opportunities

A limited supply of small bay industrial properties creates a strong value proposition for investors.

Key Market Insights:

• Zoning and Land Use Restrictions: Many urban areas have strict zoning laws that limit the development of new industrial properties.
• Land Scarcity: Prime locations suitable for small bay industrial spaces are often limited.
• High Construction Costs: Rising material and labor costs make new developments expensive, leading to increased demand for existing properties.

7. Inflation Protection and Lease Terms

Small bay industrial investments offer protection against inflation due to their shorter lease terms and frequent rental adjustments.

Advantages for Investors:

• Ability to Adjust Rents Frequently: Shorter industrial leases allow landlords to keep up with market rental increases.
• Tenant Turnover Benefits: While turnover can be a risk, it also provides opportunities to capture higher rental rates.
• Operating Expense Pass-Throughs: Many lease structures pass increasing costs to tenants, reducing financial risk for property owners.

Final Thoughts

A well-crafted pro forma is essential for making informed investment decisions in small bay industrial real estate. By focusing on the seven key areas outlined above, investors can enhance accuracy, attract lenders and partners, and improve overall investment appeal.