What lease duration aligns with investor exit timelines for a profitable sale?

For investors in industrial real estate—whether developing for lease or purchasing leased assets—the length of tenant lease agreements plays a critical role in ensuring predictable income, enhancing valuation, and enabling a profitable exit. The right lease duration should align with typical investment holding periods, exit cap rate strategies, and market buyer expectations.

Below are the key factors and lease duration benchmarks that support a strategic investor exit:

1. Minimum Lease Tenure for Institutional Appeal

• Standard Benchmark: 9 to 15 years total lease term, including lock-in and renewal options.
  
• Breakdown:
  
  • Initial lease period: 5 to 9 years
    
  • Lock-in period: Minimum 3 to 5 years
    
  • Escalation clause: 5% to 7% annually or every 3 years
    
• Investor Benefit:
  
  • Increases asset stability
    
  • Attracts yield buyers such as REITs, private equity funds, and NBFCs

2. Exit Timeline Alignment for Developers and Funds

• Typical Holding Periods:
  
  • Short-term developers: 3–5 years (pre-leased asset sale after stabilization)
    
  • Private equity or HNI investors: 5–7 years (for capital gains and rental yield)
    
  • Long-hold core funds: 10+ years
    
• Implication:
  
  • A lease with a minimum of 4–5 years remaining at the time of exit is ideal to command full asset valuation.
    
  • Buyers discount assets with expiring leases or high renewal uncertainty.

3. Tenant Stickiness Based on Industry Type

• Heavy Manufacturing Tenants:
  
  • Prefer 10–15 year leases due to large capex and custom-built facilities.
    
  • Offer long-term visibility for investors.
    
• Logistics and 3PL Operators:
  
  • Lease terms of 5–9 years are common, with flexibility to expand.
    
  • Strong renewal trends if the location supports regional distribution.
    
• Tech or Assembly Units:
  
  • Often sign 3–6 year leases, but may renew frequently if the infrastructure is suitable.

4. Valuation and Capitalization Impact

• Cap Rate Compression:
  
  • Assets with long-term leases (5+ years remaining) and high-credit tenants trade at lower cap rates, increasing sale value.
    
  • Short leases or low lock-in reduce price due to risk adjustment.
    
• Buyer’s Due Diligence:
  
  • Focuses on lease tenure, escalation terms, and early termination clauses.
    
  • Exit value is maximized when lease terms are long, enforceable, and aligned with market yield trends.

5. Market Benchmarking and Buyer Expectations

• REIT and institutional buyers typically require:
  
  • Minimum 6–9 year lease term on stabilized assets
    
  • Prefer properties with multi-tenant diversity and staggered expiry.
    

Private buyers may accept shorter terms but demand higher yields.