How Investors Can Mitigate Risk by Buying Multi-Tenant Industrial Properties

Prospective industrial investors are generally presented with two options: the option to buy a single-tenant building vs. a multi-tenant property. There are certainly pros and cons associated with each of these investment strategies.

However, in today’s uncertain economic climate, investors will want to take a close look at multi-tenant industrial properties. Historically, multi-tenant industrial properties offer better risk-reward ratios than single-tenant properties.

Here’s why.

· Multi-tenant properties have shorter lease terms. Lease terms generally range from 3 to 5 years, which allows the owner to adjust to changing market conditions. Single-tenant properties tend to have 5-10+ year lease terms, which locks the owner into lease conditions that may no longer be advantageous as the economy changes.

Historically, multi-tenant industrial properties offer better risk-reward ratios than single-tenant properties.

· Multi-tenant properties have diversified rent rolls. This means that they are leased to unrelated tenants in different businesses and across various industries. If one tenant’s business should fail unexpectedly, the overall cash flow for the property may be reduced but it does not become zero as it would in a single tenant property. Additionally, if the overall economy suddenly affects one industry — such as e-commerce — tenants in other industries will likely not be impacted and will be able to sustain the property’s cash flow.

· Cash flows to the owner/investor of a multi-tenant property are more sustainable and regular. This is because the property has multiple leases with varying lease expiration dates. For example, although a multi-tenant property may only periodically achieve 100% occupancy — and typically be stabilized at 90–95% occupancy — it would take a catastrophe to experience 0% occupancy as could be the case when a single tenant property experiences vacancy.

A tenant that occupies an entire building has significant negotiation strength because the owner would face 100% vacancy and no cash flow if that tenant vacates.

· A multi-tenant property is more likely to have reusable interior and exterior finishes. The ability to re-use existing space as-is significantly reduces the tenant improvement costs for future tenants, thereby making the space more attractive. Tenants can easily envision how the space will look and how it can be customized for their specific business needs. Single-tenant buildings often have more customized and often more expensive fit-outs that are not as easily reused by future tenants upon lease expiration.

· Tenants in a multi-tenant property often have less negotiating power. A tenant that occupies an entire building has significant negotiation strength because the owner would face 100% vacancy and no cash flow if that tenant vacates. A tenant in a multi-tenant property has far less negotiating strength due to its smaller size and far less impact on the property’s overall cash flow. For example, if a tenant occupies 10% of the property’s total space in a multi-tenant property and then vacates, the owner will still likely have sufficient cash flow from the other tenants to pay operating expenses and debt service.

A single tenant property’s value diminishes as the length of the lease term decreases.

· Existing tenants often absorb vacant spaces as they become available. Many tenants will sign a lease just to get their foot into the door in a specific geography or property. If the business is successful, the owner may want to expand their footprint. Most business owners want to keep their operations close-by (especially when there is a large volume of employees). This means that when a space becomes available in a multi-tenant building, one of the existing tenants is usually ready to jump at the opportunity to lease the space before it hits the broader market.

· Multi-tenant properties offer owners/investors a more stabilized value throughout an entire economic cycle. A single tenant property’s value diminishes as the length of the lease term decreases. Based on our experience, a multi-tenant property’s value tends to be more stabilized because of its varying lease expirations and diverse rent roll. Although a multi-tenant property’s capitalization rate may be higher (meaning less valuable) than a single tenant property when the tenant’s lease has more than 7–10 years remaining, the opposite is generally true when the single tenant property has less than 7 years lease term remaining. Because value is so dependent on lease term for a single tenant property, a multi-tenant property can offer a more stabilized value and offer less risk to the owner/investor.

Conclusion

Multi-tenant industrial properties are certainly more management intensive than a single-tenant property—a fact that prospective investors should not overlook. However, these properties can also help mitigate the risk associated with owning real estate during an economic downturn. Those who are concerned about the direction of the economy will want to consider investing in a multi-tenant industrial property as a way of softening the blow of any market correction.

Are you ready to buy industrial property? Contact us today!

About the ComReal Miami Industrial Team: The ComReal Miami Industrial Team has been assisting companies with their South Florida real estate needs for over 30 years. The industrial team specializes in the sales and leasing of industrial properties. Visit Warehouses Market and/or call 786-433-2380 for more information.