JLL’s Corey Gustafson on Trends in Industrial Real Estate Valuation

Corey Gustafson, MAI, is executive managing director and national Core Four leader at JLL Value & Risk Advisory in Boston.

MBA NewsLink: What are the most significant valuation trends currently impacting the industrial property sector nationwide, especially as seen through the lens of mortgage banking?

Corey Gustafson: The defining trend is bifurcation — by asset quality, by size segment and increasingly by power capacity. Cap rates for the highest-quality industrial product have stabilized in the low 5% range nationally, with high-credit national tenants on long-term leases trading tightest. That stability masks meaningful divergence underneath.

Bulk product (500,000 SF and above) has recovered leasing momentum, with availability dropping meaningfully over the past year, and small-bay product remains the healthiest segment of the market. Small-to-mid-sized product (sub-250,000 SF) has seen a slower recovery, and elevated speculative supply in the broader logistics pipeline continues to weigh on absorption in certain markets. Sublease availability across the logistics sector sits near record levels.

From a mortgage banking perspective, lender behavior tells the story most clearly. Life companies are pricing quality industrial debt aggressively — in some cases 75 to 100 basis points inside debt fund quotes on stabilized product. Regional and national banks that received elevated payoffs in Q1 are actively seeking fully funded loans, and that capital deployment pressure is compressing spreads on the best assets. The underwriting criteria themselves are shifting — tenant credit, lease duration and building functionality remain central, but electrical power capacity is emerging as a fourth variable. Institutional portfolio data now shows a meaningful total return premium for high-power assets over low-power assets. Retrofitting existing buildings for heavy electrical load runs an estimated 10 to 20 times the cost of building new, which creates scarcity value that both lenders and investors are beginning to price explicitly.

MBA NewsLink: How are ESG factors influencing industrial valuations and lending practices today?

Corey Gustafson: The ESG conversation in industrial has moved well beyond certifications and sustainability ratings. In practice, institutional lenders and equity investors are underwriting infrastructure resilience and energy capacity as the more material variables. Power availability is now a primary differentiator. Commercial electricity demand has risen sharply since 2023, driven by data center operators, semiconductor manufacturers and electrification-linked tenants in robotics, aerospace and defense, and pharmaceutical production. These tenants carry higher profit margins, need power immediately and will pay for access. Markets with grid capacity and generation infrastructure in the pipeline are attracting disproportionate capital as a result. Texas illustrates the dynamic: Commercial electricity sales have grown roughly 20% since 2019, the state has approximately 80 GW of new generation capacity in its three-year pipeline and commercial electricity prices have risen only modestly relative to national peers. On the operating cost side, tenant exposure to energy and input price volatility has become a credit consideration in its own right. Diesel prices have spiked on geopolitical disruption, manufacturer input prices for metals are up 20% to 30% year-over-year on tariffs and trucking rates are rising even on flat volumes.

Lenders are examining tenant operating margins more closely, and the practical question in underwriting has shifted from whether a building carries a sustainability certification to whether the asset can serve tenants whose energy and infrastructure requirements are growing, at a cost structure that supports occupancy through a full cycle.

MBA NewsLink: What are the main risks and opportunities lenders should track in the industrial space amid ongoing supply chain and macroeconomic challenges?

Corey Gustafson: The supply cycle is normalizing, but the pace varies significantly by market and product type. Speculative construction has pulled back from its pandemic-era peak, and markets like Phoenix and Dallas-Fort Worth are actively working through elevated vacancy as absorption catches up to recent deliveries. The inflection point where net absorption outpaces new supply is now expected in early 2027 rather than late 2026 and select markets will reach equilibrium sooner than others. The adjustment is most visible in the small-to-mid-sized product segment (sub-250,000 SF), where leasing activity has been slower to recover, while bulk product (500,000 SF and above) has seen stronger institutional demand and declining availability. For-sale listings at the largest size ranges remain elevated by historical standards, and a significant share of those listings are fully vacant, which creates both risk for existing lenders and entry points for new capital. Tariff-driven input cost inflation adds further pressure to development underwriting: metals prices are elevated, the trade uncertainty index remains above both the 2018 trade war and pandemic highs, and containerized import forecasts for 2026 are flat to down.

The opportunity set is strong for lenders who are selective. Current values sit approximately 25% below replacement cost nationally, which means rational new supply competition is effectively precluded until that gap closes. That repricing creates a structural floor for lending against existing, well-located product. Geographically, a small number of markets are showing both higher pricing and higher transaction activity relative to pre-pandemic baselines: Tampa, Charlotte and Dallas stand out. Texas is absorbing roughly 40% of national net absorption, with Houston ranking first in the country for industrial transaction counts. Small-bay product (sub-50,000 SF) remains the healthiest segment, running only 5% below its multi-year leasing peak with limited sublease exposure. Bulk logistics leasing has recovered above pre-pandemic norms, and institutional buying activity for the largest properties remains healthy. The risk-adjusted opportunity for lenders is stabilized product in markets with demonstrated absorption momentum rather than speculative development in segments still working through supply.

MBA NewsLink: How is the evolution of industrial property types, such as cold storage, data centers and last-mile distribution, factoring into valuation approaches and lender appetite?

Corey Gustafson: Specialization carries a real premium, but the story is more complex than it was two years ago. The AI and onshoring buildout is now the primary demand driver across specialized industrial; most import growth, most non-pharma manufacturing construction spending and the largest capacity utilization gains are concentrated in semiconductors, electrical equipment and data center infrastructure. Warehousing construction spending, by contrast, has pulled back meaningfully from pandemic highs. The capital is following the structural demand shift.

Data centers present a distinct valuation challenge. The bull case centers on power scarcity, pre-committed demand from hyperscale operators, and limited ability to add supply quickly. The bear case — which is gaining traction among credible market participants — focuses on the pace of construction spending and whether the market is beginning to position for oversupply. Technical obsolescence risk is real and often underappreciated in lender underwriting; hardware generations compress rapidly and facilities built even a decade ago can require full infrastructure replacement to remain functional. Conversion to traditional warehouse use is sometimes the rational path, but that repositioning carries its own cost and timeline risk.

Lenders evaluating data center exposure need to underwrite the operational layer, not only the real estate, and the residual value question is more complex than for conventional industrial. On the logistics side, tenant behavior is reshaping what functional product looks like. Average clear heights for newer-vintage tenants have moved to approximately 33 feet, while average lease sizes have dropped from a pandemic peak near 230,000 SF to roughly 170,000 SF. Tenants are going taller and more efficient on footprint, which means older, lower-clear-height product is losing tenants while modern high-bay space in the right locations commands both the rent premium and the investor interest. Industrial and multifamily together still represent approximately two-thirds of core fund allocations, but alternative sectors including data centers and life science account for less than 20% of actual transaction volume despite substantial capital raises targeting those strategies. That gap between capital raised and capital deployed signals crowding risk for lenders and equity investors pursuing the same limited deal flow.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)