Multi-Tenant Industrial Real Estate
22 July, 2021 · 5 min read
Present-day, there’s now a steady demand for an asset class of real-estate that caters to the business needs of both SMBs and small local divisions of large national and international businesses.
These needs include space for warehouses, retail shops, logistics, showrooms, flex office spaces, and SMB manufacturing operations coming up around the country.
This is where multi-tenant real estate comes in.
What Is Multi-tenant Industrial Real Estate
Multi-tenant real estate is an asset class that offers commercial space for small and medium enterprises on a lease. Moreover, it provides small and local real estate solutions for large established national and international businesses.
It’s a break from the traditional single-tenant real estate that involved a single large company on a single property for a long-term lease.
Multi-tenant real estate is usually smaller-with most of the rooms sized at 15000-20000 sq. ft and shared among several small and medium manufacturing and service industries.
Who Invests In Multi-tenant Industrial Investment
The rise of multi-tenant industrial real estate is being fueled by investors looking for a low-priced real estate asset class that they can lease for the short term. These are:
Investors Looking For A Varied Tenant Base
Unlike single-tenant CRE, the investors in multi-tenant real estate are also looking for a diverse and resilient tenant base.
Having a single industrial tenant comes with many problems of its own. That’s why many invest in multi-tenant industrial real estate.
Investors Looking For A Low-Maintenance Investment
The investors in multi-tenant industrial real estate are also looking for a less-flashy investment. They and are not in the market for an asset with high CAPEX and maintenance costs.
Multi-tenant IRE is less flashy in that it doesn’t require the character and design it takes to bring something like residential real estate to life.
Investors Looking For A Stress-Free Investment
Last but not least, industrial real estate is for investors that want a hassle-free investment. Investing in multi-tenant real estate is one way to avoid all the management issues, rent control legislations, scrutiny, and discrimination laws that comes with residential real estate.
Why Multi-tenant Industrial Investment Assets
Small and medium businesses are still the backbone of the global economy. That said, they were responsible for 61.8% of job growth from 1994 to 2016.
Multi-tenant IRE is that often overlooked asset class of real estate that houses the operations of these small and medium enterprises; that’s why industries should consider investing in it.
What’s the best thing about leasing to small and medium businesses? Well, there are millions of them in America for a start. Every day a small or medium business collapses, there’s probably another small and medium business forming a few blocks over.
Low-Risk Of High Vacancy
One should invest in multi-tenant industrial real estate because there’s a low risk of vacancy, unlike single-tenant and residential real estate. This is because in multi-tenant real estate, you house commercial tenants from a diverse range of industries.
Hence if one industry takes a hit or is struggling (like tourism during the pandemic), the other industries can still be stable (think of online shopping warehousing during the pandemic).
The diversity of your tenants plays a pivotal role in reducing the chances of high vacancy rates in multi-tenant commercial real estate.
In addition, multi-tenant IRE has a relatively low rollover. Replacing a tenant for a warehouse or a showroom is easier and cheaper than replacing someone who moved out of a residential apartment complex.
Low-Risk Of Debt Service Default
The diversity of the tenant and the certainty of cash flow under multi-tenant industrial real estate also enables this asset class to have a relatively low risk of debt service default.
This certainty of cash flow is unlike in residential real estate where the tenant is most likely employed, disposable during economic downturns, and subsequently hard to replace during those same economic downturns.
Similarly, its cashflow is better than single-tenant IRE, where the tenant has a steady cash flow but could easily be run out of business during a recession or a bear market and be hard to replace during that same time.
Furthermore, you can assess your tenants’ credit and year-over-year performance before signing a lease, which increases the certainty of cash flow and reduces the chances of debt service default.
Upsides Of Multi-Tenant Mania
Any asset class that offers the flexibility, diversity, and simplicity multi-tenant IRE offers is bound to come with many upsides.
Some of the benefits that multi-tenant IRE has over single-tenant IRE and residential real estate include:
1. Competitive Lending Structures
The lending structures for multi-tenant IRE are relatively favorable compared to single-tenant IRE and residential real estate.
2. Max leverage in major markets
The high yields and the relatively low cost of multi-tenant IRE in major markets create a scenario where an investor can get maximum leverage.
In this case, and with the right advice and market, an investor can build equity in the long term, amortization in the short term, and generate cash flow, all with borrowed money.
3. 10 year fixed terms typical
Investing in multi-tenant IRE often means that investors get to benefit from all the advantages that come with 10-year fixed terms.
A ten-year fixed term protects your portfolio from an increase in the interest rate and is cheaper in the long run.
Since the lending terms are fixed, you have the certainty that your refinancing costs will remain constant throughout the lending period.
4. Non-recourse available at lower rates
At lower financing rates, lending for most multi-tenant IRE is non-recourse-based. This clause means that the lender can only recoup or action assets limited to the project which the loan was funding in case of a default.
This makes investing in multi-tenant IRE at lower rates a low-risk investment since the investor is shielded from the loss of other assets in the unlikely scenario he/she defaults on the loan.
5. Stable Income Producing Asset
The basic principle of modern-day investment is never to put all your eggs in a single basket. It’s the foundation behind principles like mutual funds, diversification, and multi-tenant commercial real estate.
6. NNN leases are ideal for minimal landlord responsibility
It is easier to lease a multi-tenant IRE on an absolute-triple net lease. This agreement is also known as an NNN lease, where the tenant takes responsibility for most of the maintenance of the property.
In this case, the tenant will be responsible for the taxation, insurance, and common area maintenance, unlike in residential real estate, where the investor has to offer janitorial and other managerial expenses.
Even in cases where tenants don’t accept an absolute NNN lease, they still pay for a portion of maintenance costs on most multi-tenant IRE leases.
The flexibility of NNN leases helps to reduce CAPEX expenditures significantly and reduce the responsibilities of a landlord to a bare minimum.
7. Renting to income-producing Businesses
The most significant edge multi-tenant IRE has over residential real estate is that it leases to businesses and not individuals or families.
Industrial businesses such as manufacturing and warehouse generate cash flow and are less likely to default on a lease.
Apart from their cash flow, businesses also have better contingency plans for economic downturns and can access emergency credit to wither a storm easier than a family.
Moreover, it’s easier and more socially acceptable to evict a small business that defaults or goes against the lease agreement than a struggling family—ever heard of a homeless business?
Downsides Of Multi-Tenant Mania
Every real-estate asset class comes with its fair share of cons. Despite its rise in popularity, multi-tenant real-estate still suffers from some management and cash flow problems.
Higher Management Costs
The nature of multi-tenant IRE leases comes with the advantage of lower CAPEX due to the cost-sharing of NNN leases.
However, this comes at a cost. The variety and diversity of most multi-tenant IRE leases can lead to relatively higher OPEX .
Managing a lease and payment options for different companies, operating on different payment options can lead to high management costs.
Incubator-Style Is Typically Gross-Lease
In most incubator-style multi-tenant industrial real estate, where small businesses and start-ups are nurtured, the lease is usually gross lease.
In a gross-lease agreement, the property owner pays for all the secondary expenses such as taxes, insurance, and maintenance. This makes incubator-style industrial real estate both OPEX and CAPEX intensive for the property owner.
When To Invest In Multi-tenant IRE
When you’re ready to invest in the most competitive financing structure in the market for your multi-tenant industrial deal, contact Cody Baker at Terrydale Capital.
Why Wait When You Can Start Today
Many investors across the world see an opportunity with multi-tenant IRE. However, opportunities only work once they meet preparation. There are many good days to start your multi-tenant IRE investment journey, and today is one of the best. We offer
- 5-10 Year Fixed Terms
- Up to 30 Years Amortization
- Rates as low as 2.70% (3.45% average)
- TI&LC’s Included in Loan
- Flexible Prepays
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