Looking at the price per square foot is important. Your exit could be very difficult if your buying at $130/SF vs. $200/SF. In 5 years or more you may be over replacement costs on the second property, so your tenants may choose a new building or the new buyer may not want to pay $250/SF for a building.

The zoning and the use will usually set a ratio depending on the use (office, industrial etc.). It really depends on how much office there is and your tenant mix. anywhere from 2-3/1000 is what I see. Sometimes up to 4 if it was heavy office and includes a gym or other type quasi retail use.

Are you talking specifically about rising cap rates on small bay industrial or overall? I think the market has shifted a little with IOS now becoming a more defined asset class that has garnered more institutional capital. I am not seeing a rise in cap rates as much as I am seeing sellers be pickier in what they are looking for. One thing I have seen is a large rise in rents and at times they are more than the market will bear. That will cause investors to go into a deal with a higher cap rate because they don't believe they can push rents any further or the rents may go down on a renewal or re-lease. Ways to combat this, be realistic about market rents. Investors are more prudent than they used to be. Set expectations with your clients accordingly. In a sale leaseback situation make sure you are arriving at a defendable rent number when preparing to take it to market. Possibly get the opinion of your buyers before going to market.

It looks like a metal building, I would expect it to be lower PSF especially for the larger units. I will say smaller buildings are more expensive to build PSF but I would typically expect higher end construction at almost $300/SF. If there is significant parking for a small amount of outdoor storage that might make a difference. Curious if the owner mentioned the cost of the land or at least the % of development costs. One way to get a higher return for a developer is to buy the land at $100K and push it into the development at $750K. Then you can lower your Developer fee but make as much or more.

If you pull out the land the cost to build the building (including any development fees) is $240/SF. That still seems high especially for something that isn't perfect. Smaller developments are tough to pencil but on this one it seems like if they sells one small unit he can buy the land and put that in as equity into the deal and finance the rest. So I understand why they are trying to make it work.

I find the returns are just too low to make it work at that level. If you are buying and renovating and your all in is $400/SF and rents are $18/SF you are about a 4.5% cash on cash return. If you found a way to do it at $300/SF with renovations you would be at a 6% Cash on Cash. So any debt would be negative leverage (debt more than returns). If you thought you could rent it until you could turn it into something else with higher rents (retail etc.) then it could make sense.

I agree @Will Skillman it's tough to cross over asset classes. When I was working on Class A office we paid over $600/SF for a 800K SF trophy tower in downtown Atlanta but the returns were there and the tenants were high credit. Even if the tenants moved out it would still be top of the market space. It's tough to cross over asset classes. One think that's important to make sure is that you don't buy something with in place rents that are substantially over market because while you may get that going in 7 cap could drop substantially (along with the value) if you renew or release that space.