INDUSTRIAL REAL ESTATE · MARKET COMMENTARY
What If Interest Rates Don’t Drop?
Brent Pennington, CCIM | Metroport Commercial Group
For much of the past two years, industrial property owners and investors have been waiting. Waiting for interest rates to fall. Waiting for buyers to return. Waiting for pricing to feel rational again.
The working assumption has been straightforward: once rates come down, transactions will restart, values will recover, and the market will normalize. It is a reasonable thing to believe. It is also a belief that may be wrong or too late.
With 10-year Treasury yields remaining elevated and showing little urgency to decline, the possibility that rates stay above 6 to 8 percent or higher for an extended period is no longer a fringe scenario. It is a planning reality. And if rates stay where they are, waiting is not a neutral position. It is a strategy, and not always a good one.
Why the Market Is Stuck
Today’s industrial market is defined by a standoff between what owners believe their property is worth and what investors can make work at current debt costs.
Investors are looking at their models and seeing deals that do not pencil. Debt service at today’s rates consumes cash flow that used to support acquisition pricing. Cap rates have not expanded enough to compensate for the increased cost of capital, so the numbers either require price reductions, meaningful rent growth, or cheaper financing before a deal makes sense.
Owners, for their part, remember what their properties were worth two or three years ago and are reluctant to accept that the market has moved. The instinct is to hold and wait for conditions to improve. That instinct is understandable. It is not always wise.
The result is transaction paralysis. Volume is down. Price discovery is limited. And the longer the standoff continues, the more consequential the decision to act or not act becomes.
The Question Every Owner Needs to Answer
The most productive reframe for industrial owners in this environment is not asking when rates will fall. It is asking what the right plan is if they do not. There are four meaningful strategic paths available, and each requires a deliberate choice rather than a default to inaction.
Strategy One: Hold, But Manage Aggressively
Holding an industrial asset through a period of elevated rates is a legitimate strategy, but only if the asset is being actively managed rather than passively maintained.
In a lower-rate environment, appreciation can mask operational mediocrity. A property that is loosely managed, carrying below-market rents, or structured with weak expense recovery provisions can still look fine on paper if values are rising. That cushion is gone. When appreciation is not doing the work, operations have to do it.
Owners who hold should be asking: Are my rents at market, and what is the plan for bringing them there at each renewal?
- Are my leases structured to recover real operating costs, or am I absorbing expenses that tenants should be paying?
- Is my tenant mix durable in a slower economy, or am I exposed to businesses that struggle when credit tightens?
- Is there deferred maintenance accumulating that will cost more to address next year than it does today?
Passive holding in a higher-rate environment is where value quietly erodes. Every dollar of operational inefficiency that once seemed manageable becomes a real drag on return when income is the primary source of value.
Strategy Two: Reposition the Asset for a Different Buyer
Many industrial assets were underwritten and acquired in a capital market that no longer exists. That does not make them bad assets. It may mean they need to be looked at differently.
In the prior cycle, yield buyers, investors purchasing stabilized income assets at compressed cap rates, were the dominant exit for industrial owners. In the current environment, that buyer pool has contracted. The buyer who is still active, still motivated, and still paying reasonable prices is often the owner-user: a business owner who wants to own the building their company operates from rather than continuing to pay rent that keeps rising.
Repositioning that buyer might mean shorter remaining lease terms are an advantage rather than a liability. It might mean investing in improvements that make the building more functional for an occupying business rather than more attractive to a yield investor. It might mean reconsidering the land coverage, the loading configuration, or the office finish to make the asset more competitive for the buyer pool that is actually in the market to buy.
The shift from marketing to investors to marketing to owner-users is not a concession. In the current environment, it is often simply correct market positioning.
Strategy Three: Accept Repricing and Act Early
This is the hardest option emotionally. It is frequently the most rational one financially.
Industrial values have adjusted from their 2021 and 2022 peaks in most markets, and the direction of that adjustment is tied to interest rates that are not declining on any predictable schedule. Owners who are waiting for values to return to prior peaks are making a bet on monetary policy that may not pay off, and meanwhile the carrying costs, management demands, and opportunity costs of holding continue to accumulate.
Owners who sell early in a repricing cycle consistently preserve more capital than those who hold through the bottom waiting for a recovery that arrives later than expected or less completely than hoped. The relevant question is not whether today’s price equals the peak. It is whether the proceeds from a sale today, deployed productively elsewhere, outperform continued ownership of an asset in a market defined by rate uncertainty.
| The question is not: can I get what my property was worth three years ago? The question is: what outcome do I want from this capital over the next five to ten years, and does holding this asset give me the best path to that outcome? |
Strategy Four: Reduce Risk Without Selling
Selling is not the only tool available to owners who want to reduce their exposure to a prolonged high-rate environment.
A sale-leaseback allows an owner to convert real estate equity to liquid capital while remaining in the building as a tenant under a long-term lease. The owner gets the cash, retains operational continuity, and transfers the real estate risk to an investor who takes a longer view on rate normalization. This structure works particularly well for business owners whose company is the primary tenant, because the business value and the real estate value can be separated and optimized independently.
Partial recapitalizations, where a new equity partner is brought in to absorb some of the balance sheet exposure in exchange for a share of future upside, are another option for owners who believe in the long-term value of their asset but want to reduce their concentration in a single illiquid position.
Long-term fixed-rate refinancing, where loan terms allow it, can stabilize cash flow and extend the runway for owners who need time but have the income to support debt service at current rates. This is not a value-creation strategy, but it can be an effective risk management tool for owners with solid occupancy and strong tenants.
These structures are more complex than a straightforward sale, and they require the right professional team to execute well. But complexity is often where real options exist when the straightforward path is not available or not attractive.
The Structural Shift That Changes the Playbook
The most important thing for industrial owners and investors to understand about the current environment is that higher interest rates may not be temporary and there could be other political and economic factors that will be equally disruptive to increasing asset prices.
The decade from roughly 2010 to 2022 was characterized by historically low interest rates, expanding cap rate compression, plentiful capital, and an industrial market turbocharged by e-commerce demand that made almost any well-located property look smart in hindsight. That era is over, and the conditions that defined it are not likely to return fully.
Labor costs are structurally higher. Capital is priced differently and availability could be restricted. The institutions that drove the most aggressive industrial acquisitions have recalibrated their return requirements. Supply chains are still adjusting. None of this means industrial real estate is impaired as an asset class. It means the playbook from the prior cycle no longer applies, and owners who are still running it are playing a game that has changed around them.
The Real Risk Is Not Acting
Waiting feels like a safe default. In a period of uncertainty, doing nothing seems less risky than making a decision that could be wrong. But inaction has its own costs that are easy to underestimate because they accumulate over time rather than arriving all at once.
Lease rollovers in a softer demand environment may produce lower renewal rents or extended vacancy between tenants. Deferred maintenance in moderate or high inflation compounds in cost every year it goes unaddressed. Capital tied up in an underperforming asset is capital not available for the acquisition or improvement that will create value. And the longer an owner waits for conditions to reverse, the fewer attractive options remain if the reversal does not come.
In a higher-rate environment, time is not neutral. It has a cost, and that cost should be part of every decision about whether to hold, reposition, sell, or restructure.
A Better Way to Think About It
Industrial real estate remains one of the most durable and productive categories of commercial property available to owners and investors. It is not broken. The demand fundamentals, supply chain investment, population growth in Sun Belt markets, and the continued need for manufacturing and distribution space are all real and they support the long-term value of the asset class.
What has changed is the environment in which decisions must be made. The owners who navigate this cycle well will not be the ones who waited the longest for rates to fall. They will be the ones who assessed their actual situation honestly, identified the most productive path forward given current conditions, and acted on a plan rather than a hope.
The right question for every industrial owner right now is simple: what decisions make sense for my specific situation if interest rates stay where they are? Answering that question clearly is the beginning of a real strategy.
About the Author
Brent Pennington, CCIM | Senior Vice President & Commercial Real Estate Advisor | Metroport Commercial Group (eXp Commercial)
Brent Pennington, CCIM, is a Senior Vice President and Commercial Real Estate Advisor with Metroport Commercial Group (eXp Commercial), specializing in industrial and flex properties and tenants across the Dallas-Fort Worth metroplex. A Baylor University graduate with degrees in Accounting and Entrepreneurship, Brent brings a rare combination of financial literacy and operational credibility to every client engagement.
With 35+ years of prior experience as a business owner in manufacturing, distribution, and retail, he understands industrial real estate from both sides of the transaction as the operator who occupied the space and as the advisor who guides owners through dispositions, acquisitions, leasing strategy, 1031 exchanges, and sale-leaseback structures. That dual perspective gives his clients something most brokers cannot offer: counsel grounded in how a building functions as a business asset.
Brent serves industrial property owners across the DFW submarkets of Plano, McKinney, Allen, Richardson, Garland, and Northeast Dallas with a particular focus on long-term owners approaching a business transition, generational wealth transfer, or exit from active management. His advisory approach is grounded in biblical stewardship principles, helping owners make decisions that honor both their financial legacy and their long-term values.
As a member of NTCAR and holder of the CCIM designation, the commercial real estate industry’s most rigorous analytical credential, Brent is a recognized thought leader on North Texas industrial market trends, owner exit strategies, and CRE wealth preservation.
Connect with Brent at 817-999-8266 | brent@metroportcommercial.com | metroportcre.com
The content on this site is provided for informational purposes only and does not constitute legal, financial, tax, or investment advice. Commercial real estate transactions involve complex variables that differ by property, market, and individual circumstance. Readers should consult qualified legal, tax, and financial professionals before making any real estate or business decision. Brent Pennington, CCIM, and Metroport Commercial Group (eXp Commercial) make no representations regarding the accuracy or completeness of information presented and assume no liability for decisions made in reliance on this content. All market information reflects conditions at the time of publication and is subject to change
FAQ
Industrial real estate owners facing a prolonged high-rate environment have four productive paths forward. The first is aggressive active management of the existing asset, pushing rents to market at every renewal, recovering real operating costs through proper lease structure, and addressing deferred maintenance before it compounds. The second is repositioning the property for an owner-user buyer rather than a yield investor, which opens a different and often more active buyer pool. The third is accepting current pricing and selling early in the repricing cycle rather than holding through a bottom that may arrive later or less completely than expected. The fourth is reducing risk without selling through a sale-leaseback, a partial recapitalization, or a long-term fixed-rate refinance where loan terms permit.
Industrial property value is driven by net operating income divided by a capitalization rate that reflects the market’s return expectation for that asset type. When interest rates rise, investors require higher returns, which pushes cap rates upward. A higher cap rate applied to the same net operating income produces a lower property value. Simultaneously, higher borrowing costs reduce what buyers can pay while still achieving acceptable returns, compressing the buyer pool and putting additional downward pressure on pricing from the demand side.
Maybe. The answer depends on the specific asset, the owner’s financial position, and what the alternative uses of the capital would be. Owners who sell early in a repricing cycle consistently preserve more capital than those who wait through the bottom for a recovery that arrives later or less completely than hoped. The relevant question is not whether today’s price equals the prior peak. It is whether the proceeds from a sale today, deployed elsewhere, outperform continued ownership through a period of rate uncertainty and soft transaction volume.
A sale-leaseback is a transaction in which a business owner sells their industrial property to an investor and simultaneously signs a long-term lease to remain in the building as a tenant. The seller converts real estate equity to working capital while retaining full operational use of the space. The buyer receives a stabilized, income-producing asset with a committed tenant whose business depends on the specific facility. Sale-leasebacks are particularly well-suited to manufacturing and distribution properties where the tenant’s operational attachment to the building creates a strong economic incentive for long-term occupancy.
Repositioning for an owner-user buyer means shifting your marketing focus from yield investors to businesses that want to own and occupy the building themselves. Owner-users evaluate a property based on operational fit rather than cap rate, which changes what matters in the sale. Shorter remaining lease terms, certain loading configurations, and locations that yield investors pass over can be advantages when marketing to an owner-user. In a high-rate environment where yield investors are constrained by debt service math, the owner-user market is often the most active and most realistic buyer pool for industrial properties in the 2,000 to 50,000 square foot range.
Passive holding risk is the quiet erosion of value that occurs when an owner maintains a property without making deliberate decisions about rents, expenses, tenant quality, and physical condition. In an appreciating market, rising values mask operational inefficiency. In a flat or declining market, below-market rents, unrecovered operating expenses, and deferred maintenance accumulate as real costs that reduce what the property is ultimately worth. Owners who hold through a difficult environment without active management typically exit with meaningfully less value than those who treated the hold period as an active management assignment rather than a waiting exercise.
A meaningful decline in interest rates would likely support industrial property values by reducing borrowing costs, expanding the buyer pool, and improving the return calculations that drive acquisition pricing. The magnitude of any recovery would depend on the speed and depth of rate declines, the volume of new industrial supply delivered in the interim, and the broader economic environment affecting tenant demand. Industrial real estate’s underlying fundamentals, including supply chain investment, continued population growth in Sun Belt markets, and sustained demand for manufacturing and distribution space, support the long-term value of the asset class regardless of the rate path.
The most productive frame is asking what the right plan looks like if conditions do not improve on the timeline originally expected. That means stress-testing income and expense assumptions, benchmarking current rents against the market, reviewing lease expirations and renewal probability, confirming debt covenant compliance, and identifying which assets are well-positioned to hold and which are not. Investors who make those assessments clearly and act on them deliberately are consistently better positioned than those who are waiting passively for rate relief that may arrive later than expected.
