Multi-Tenant Industrial Mania
Terrydale Capital
Jun 28, 2023 18 Min read
The emergence of multi-tenant industrial real estate has been anticipated for quite some time. Its roots can be traced back to the surge of online shopping in the late 90s, and the signs have been evident ever since. The current scenario reflects a consistent demand for a real estate asset class that caters to the requirements of both small and medium-sized businesses (SMBs), as well as local branches of large national and international companies.
These requirements encompass various business functions such as warehousing, retail outlets, logistics, showrooms, flexible office spaces, and the burgeoning SMB manufacturing operations across the country. This is precisely where multi-tenant real estate plays a crucial role.
What Is Multi-tenant Industrial Real Estate
Multi-tenant real estate represents a distinct asset class designed to cater to the needs of small and medium-sized enterprises (SMEs) through leasing commercial spaces. In addition, it offers viable real estate solutions tailored to the requirements of established national and international businesses at a local level.
This concept marks a departure from the conventional approach of single-tenant real estate, where a single large company occupies a property on a long-term lease basis.
Typically, multi-tenant real estate comprises smaller units, with most rooms ranging from 15,000 to 20,000 square feet, accommodating multiple SMEs in the manufacturing and service industries. These shared spaces foster collaboration and resource optimization among the tenants.
Who Invests In Multi-tenant Industrial Investment
The surge in multi-tenant industrial real estate can be attributed to the growing interest of investors seeking affordable real estate assets that can be leased for shorter durations. These include:
Investors Looking For A Varied Tenant Base
Unlike single-tenant commercial real estate (CRE), investors in multi-tenant real estate are also motivated by the desire to have a diverse and resilient tenant base.
Relying on a single industrial tenant can present numerous challenges and risks. That's precisely why many investors opt to invest in multi-tenant industrial real estate. By having multiple tenants occupying the property, the potential risks associated with relying solely on a single tenant are mitigated. This diversified approach provides investors with a more stable and secure investment opportunity.
Investors Looking For A Low-Maintenance Investment
Investors in multi-tenant industrial real estate are also drawn to its less flashy nature. They are not seeking assets with high capital expenditure (CAPEX) and maintenance costs.
Compared to other types of investments, multi-tenant industrial real estate does not require the same level of aesthetic character and design typically associated with bringing residential real estate to life. Its focus is more on providing functional and practical spaces for tenants rather than emphasizing ornate features or luxurious amenities. This streamlined approach appeals to investors who prioritize cost-efficiency and long-term profitability over extravagant aesthetics.
Investors Looking For A Stress-Free Investment
Lastly, industrial real estate appeals to investors who seek a hassle-free investment experience. Investing in multi-tenant real estate offers a way to avoid the management complexities, rent control regulations, scrutiny, and discrimination laws that are often associated with residential real estate.
Unlike residential properties, industrial real estate is primarily focused on providing spaces for business operations rather than dealing with the intricacies of residential tenancy. This shift allows investors to steer clear of potential challenges related to tenant management, regulatory compliance, and the ever-evolving legal landscape surrounding residential properties. By choosing multi-tenant industrial real estate, investors can enjoy a more streamlined and less burdensome investment journey.
Why Multi-tenant Industrial Investment Assets
Small and medium businesses continue to be the backbone of the global economy, playing a crucial role in job creation. In fact, from 1994 to 2016, they accounted for an impressive 61.8% of job growth.
Multi-tenant industrial real estate represents an often overlooked asset class that serves as the operational hub for these small and medium enterprises. This is why industries should seriously consider investing in this sector. By providing spaces specifically tailored to the needs of these businesses, multi-tenant industrial real estate offers a valuable solution for their growth and success.
One of the remarkable advantages of leasing to small and medium businesses is the sheer abundance of such enterprises in America. Every day, while some small or medium businesses may face challenges or cease operations, there are likely new ones emerging just a few blocks away. This continuous entrepreneurial activity ensures a steady demand for spaces within the multi-tenant industrial real estate market, making it an attractive and resilient investment opportunity.
Low-Risk Of High Vacancy
Investing in multi-tenant industrial real estate offers a lower risk of vacancy compared to single-tenant and residential real estate. This is primarily due to the diverse range of commercial tenants housed within multi-tenant properties.
In multi-tenant real estate, tenants come from various industries, which mitigates the risk associated with relying solely on one industry. For instance, if a particular industry, such as tourism, experiences a downturn (as seen during the pandemic), other industries, like online shopping warehousing, can remain stable. This diversity of tenants plays a pivotal role in reducing the likelihood of high vacancy rates in multi-tenant commercial real estate.
Furthermore, multi-tenant industrial real estate has a relatively low turnover rate. Replacing a tenant for a warehouse or a showroom is typically easier and more cost-effective compared to replacing a tenant in a residential apartment complex. This is because commercial tenants tend to have longer lease terms and stable business operations, resulting in a more consistent and reliable income stream for the property owner.
Low-Risk Of Debt Service Default
The diversity of tenants and the reliable cash flow in multi-tenant industrial real estate contribute to its comparatively low risk of debt service default.
Unlike residential real estate, where tenants are typically employed and their disposable income can be affected during economic downturns, multi-tenant industrial real estate enjoys a higher level of certainty in cash flow. This is because commercial tenants are more likely to have stable business operations and revenue streams, making them less prone to financial instability during challenging economic periods. Consequently, they are also easier to replace if necessary.
Similarly, the cash flow in multi-tenant industrial real estate tends to be more secure compared to single-tenant industrial real estate. In single-tenant scenarios, while the tenant may have a steady cash flow, they are susceptible to being forced out of business during a recession or bear market. This poses a greater challenge when it comes to finding a replacement tenant during the same economic conditions.
Furthermore, in multi-tenant industrial real estate, you have the opportunity to assess the creditworthiness and year-over-year performance of potential tenants before signing a lease. This assessment process enhances the certainty of cash flow and reduces the likelihood of debt service default, providing additional safeguards for investors.
Upsides Of Multi-Tenant Industrial
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
Compared to single-tenant IRE and residential real estate, the lending structures for multi-tenant industrial real estate (IRE) are notably advantageous.
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 Industrial
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
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. Take advantage of:
- 5-10 Year Fixed Terms
- Up to 30 Years Amortization
- TI&LC’s Included in Loan
- Flexible Prepays
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.
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Headquartered in Dallas, Texas, Terrydale Capital is a leader in commercial real estate financing. We have close relationships with the nation’s top banks, lenders & family offices allowing us to provide the most competitive financing solutions in the market.
