Single Tenant Property vs. Multi-Tenant Real Estate? Your FAQs Answered
Developing an investment plan is crucial to realizing your financial goals. Each investor has their own investment and asset criteria, ultimately leading them to choose either a single tenant or a multi-tenant option.
These asset types vary significantly in administrative requirements, cash flow, financing, and a range of other factors. As such, carefully considering their unique benefits and drawbacks can help you make a more informed investment decision.
This blog looks at the single-tenant vs. multi-tenant pros and cons and why multi-tenant assets have the edge on investors looking to enjoy appreciation and more substantial equity in a robust asset.
What is a Single-Tenant Property?
A single-tenant property is a commercial property leased by a singular entity to conduct commercial activities.
Examples include gas stations, early learning centers, warehouses, stand-alone shops or restaurants, pharmacies, or other commercial spaces. These businesses are often low-risk and generally considered to have a strong demand when in prime locations.
How is a Single-Tenant Property Governed?
Triple net leases (NNN) are considered standard practice in single-tenant deals. A NNN places obligations such as building expenses, real estate taxes, insurance, and maintenance onto the lessee on top of the cost of rent and utilities. The lessor generally covers structural repairs.
Thereby, a property owner may offer a lower rental rate to offset some of these additional costs not to burden the lessee.
The NNN is favored for its low risk and lower hassle; however, conditions and obligations will differ from deal to deal, and consulting real estate experts or legal counsel is recommended.
What is a Multi-Tenant Property?
A multi-tenant commercial property is a property that houses several commercial clients conducting business activities. Examples include shopping centers, office buildings, multifamily apartment complexes, and healthcare centers.
Multi-tenant properties are often diversified with reliable tenants and usually much larger spaces.
How is a Multi-Tenant Property Governed?
Since multiple leases within a multi-tenant property exist, deals may be modified or subject to different clauses depending on the tenant.
However, NNN agreements or gross or net leases often govern multi-tenant deals. In the latter agreement, the lessee covers rent and only some additional costs. This means a higher base rent to offset unexpected expenses and emergencies is standard.
What are the Benefits of Single-Tenant Property?
Single-tenant property is considered a more straightforward and administratively lighter investing experience. Some of the benefits include:
Ease of administration: As the lessee must cover almost all expenses within the tenancy agreement, the burden on the lessor is significantly lighter. This allows investors and managers to be much more hands-off, mitigating many of the risks associated with property administration and creating more free time.
Predictability: One tenant with one lease and income stream creates a more predictable management circumstance. These agreements are often subject to longer-term contracts meaning investors can develop more substantial equity and appreciation.
Stronger relationships: As time passes, you will build a stronger professional relationship with the lessee. However, in some instances, large multi-tenant managers such as Kenwood Management can develop the same level of community and connections with tenants.
While single-tenant real estate has some good benefits, it also has some drawbacks to consider.
What are the Drawbacks of Single-Tenant Property?
Single-tenant property is limited in its income-generating potential.
Some of the drawbacks of this type of investment include:
Singular income stream: Cash flow is limited to one tenant creating a more precarious income stream. Tenant quality can make or break your bottom line.
Higher risk investment: Total vacancy or eviction will cut the cash flow. It may also be challenging to fill the space.
The asset will require modification: Imagine that the building is a clothing store and the incoming tenant is a restaurateur. This change in tenant and commercial activity will require substantial investment (often in the form of a tenant improvement allowance) and a drastic shift in the space.
Limited value: Due to the long-term nature of a single-tenant agreement, rental agreements and predetermined rental increases are often built into the deal, making it harder to raise the rent, especially during market shifts and precarious economic conditions.
If these drawbacks cause hesitation in the idea of investing in single-tenant buildings, multi-tenant opportunities could be a better strategy for you.
What are the Benefits of Multi-Tenant Real Estate?
Multi-tenant real estate is a traditionally robust asset class favored for its security and consistency.
Some of the benefits of multi-tenant real estate include:
Vacancy security: The likelihood of a complete vacancy is minimal because there are numerous tenants within the commercial space. Even with a less than 100% vacancy rate, that asset will still produce cash flow, helping offset any risk. Additionally, lease terms can be carefully constructed to ensure the lowest possible vacancy rates at all times.
Scalability: Successful enterprises within a multi-tenant property, such as a shopping mall, will have the opportunity to rent out additional space, allowing them to expand their commercial practices.
Short-term lease: Short-term leases mean investors can find higher-value tenants quicker and make sensible rent adjustments in real time.
Diversity of space: Rather than having to fit out individual buildings each time a new tenant moves in, the variety within the area allows new tenants to move in without massive capital outlay.
With plenty of benefits, multi-tenant property is an excellent option for investing success. However, as with any strategy, there are also drawbacks.
What are the Drawbacks of Multi-Tenant Real Estate?
Multi-tenant real estate is the superior option for security, consistency, and peace of mind. However, this doesn’t mean there aren’t some drawbacks investors should be aware of. Some of these include:
Maintenance obligations and cost: Of course, relative to its size, a multi-tenant asset will be more expensive to maintain and upgrade. Costs such as lighting, HVAC, or heating are significantly more costly and often the burden of the lessor.
Complex leases and management: The day-to-day control and administration of the asset are far more complicated as you’re dealing with several tenants with different leases, legal obligations, and needs. You’re balancing taxes, liability, and expense distribution.
Higher rate of turnover: Due to the nature of shorter-term leases, there is a more significant movement of tenants within the space. This can be both a negative and a positive depending on the demand for commercial spaces and rent pricing.
An experienced management group mitigates these challenges for investors to deliver the best returns.
Enjoy the Benefits of Multi-Tenant Property With Experienced Specialists
For building generational wealth, hedging against unexpected events and security multi-tenant real estate is a superior option. However, this doesn’t mean that there are some risks involved.
By partnering with a trusted and experienced real estate group that understands the markets they invest in and takes the time to develop reciprocal relationships with tenants, you’re giving yourself the best chance of success. Reach out to the Kenwood Management team to discover how our investment philosophy makes us the right choice for investors looking to access the benefits of multi-tenant CRE.