Single-Tenant vs. Multi-Tenant Industrial Properties: Which is Right for You?
Updated: Aug 24
Investors Guide for Industrial Real Estate
As a real estate investor on Industrial properties, wealth objectives, economic conditions, level of owner involvement, and risk tolerance must be considered when buying single-tenant and multi-tenant properties. In terms of tenants, an investor can think as of going after one big fish or many little fish?
There are many pros and cons to each type of property – it’s best to weigh those against lifestyle and investment goals of investor and seek the assistance of an experienced buyer’s advisor before you make any decisions. In this article, we provide an overview of single- and multi-tenant properties and the benefits and drawbacks of each.
Single-Tenant Property Pros
Most often, single-tenant properties are rented by large corporation with strong credit and on a triple-net (NNN) lease. Example of these are XPO Logitics, Amazon, FedEx, USPS, UPS. They are typically consumer staples in prime locations that do well in any economy without wide swings in value, so they tend to be low-risk and more recession-proof.
Absolute NNN tenants pay all their own taxes, insurance, common area maintenance (CAM), and capital expenditures and maintain the property as if it were their own. Overall, little-to-no landlord involvement is required, so an investor can own nationwide locations and simply collect rent while you work and enjoy life without the hands-on management and hassles of other types of properties. The predictability is priceless.
· Hassle-free ownership with decades of reliable monthly income.
· Predictable returns and cap rates between 4-7%.
· A long-term, guaranteed lease means no or low vacancy.
· Periodic rent increases built into the lease account for inflation.
· Prime location that’s easily re-tenantable at end of the lease term.
· Opportunity to build equity over the lease term.
· High-credit corporate lease guarantee appeals to lenders.
· Passive investment shaped to fit lifestyle and investment goals.
· Enjoy life without actively managing and worrying about the property.
Single-Tenant Property Cons
Though there are few single-tenant cons, it really depends on the goals of the investor. If an investor likes to be involved in the upkeep of your properties and keep a close eye on them, an absolute NNN may not be a fit. There is also the “all-or-nothing” risk of occupancy, especially if you own just one property. If the tenant leaves at the end of the lease term, there may be a gap without any rental income while the property is on the market and/or undergoing improvements for the new tenant. If there is debt on the property, investors are still expected to pay the mortgage and taxes and expenses, such as utilities and maintenance, while obtaining your next tenant.
Multi-Tenant Property Pros
Multi-tenant properties, such industrial buildings divided in multiple bays, has the benefit of multiple tenants paying rent. This alleviates the risk of only one tenant paying rent and possibly vacating the property. If there is one vacancy at all times, , the luxury of other tenants paying rent will support your income and provide peace of mind.
These properties are more management intensive so it’s ideal for property owners who love the hands-on day-to-day management of multi-tenant properties. For some, it is a career and they draw a salary for doing so. This may provide additional tax benefits beyond depreciation and business deductions.
· Higher rental income and return.
· Less likely to be 100% vacant at any one time.
· More tenants cover rental income during vacancies.
· Ability to diversity with tenants from multiple industries.
Types of Multi-Tenant Investments
For a bit more stability within this type of investment, diversifying your multi-tenant properties is a wise strategy. Different types of tenants with an array of lease durations and types, including net-leases, and different industries can help with risk and a minimum income expectation.
There are some very reliable multi-tenant businesses – from simple logistics and manufacturing to aviation and pharmaceutical. It can also be refrigerated and cold storage. The key to finding these properties is to partner with a reputable, seasoned buyer’s advisor. An expert advisor will know the market and can see through the hype to get to the heart of a good investment.
Multi-Tenant Property Cons
Multi-tenant properties are riskier and require active management with capital investments for maintenance and improvements. There are also these considerations: short-term leases/lots of turnover, common area maintenance (CAM) costs, liability insurance, the amount of time and effort required.
Because most multi-tenant properties have shorter leases than single-tenant properties, many with less creditworthy tenants, there’s a higher risk of uncertain, revolving income and vacancies. Due to this unreliability and the inability to project long-term income, lenders tend to lend on a shorter-term basis and at higher interest rates, which may result in an overall lower rate of return.
Other disadvantages include more complicated lease terms and negotiations, management fees, possible salaries for omaintenance staff, and cumbersome details regarding allocating taxes, liability insurance, and the pro-rata amount of expenses to be shared among tenants. The good news here is that most landlord costs can be accurately estimated and factored into the rent.
Which Strategy is Best?
The property investment that’s best for you must take into consideration your personal risk tolerance, investment goals, and lifestyle. There are pros and cons to both single- and multi-tenant properties – it can be a complex decision without an obvious answer at first. That’s our team can be of great value. Give us a call today to discuss in more detail. 786-433-2383 or email Edison Vasquez