The Northwood Group

Building Partner Investors

The Multi-Tenant Property Alternative

March 13


Over the past several years, the single-tenant property market has gained a lot of momentum.  It has for good reason.  There are many advantages such as ease of accounting, management, underwriting, and predictability of cash flow.   Many investors perceive that the risk is much lower with the typical long-term leases associated with the single-tenant market.

However, many investors who follow the single-tenant trend might be missing an opportunity that actually fits their investment objectives a little better.  Multi-tenant properties often times can provide higher returns and in many cases less risk than their single-tenant competitors.  Some of those advantages include:

  1. Lower Risk – The risk is spread out over many tenants rather than having it all concentrated in one.  For example, let’s consider an all-cash, 10% cap rate property.  If that property hits a rough patch and vacany increases to 20%, the investor is still making 8%.  On the other hand, on a single-tenant property, if the tenant has an issue or doesn’t renew at the end of its lease term the return evaporates completely.  This is exacerbated if the building is a unique building requiring extensive tenant improvements.
  2. Higher Returns – Because the trend right now is towards single-tenant properties, there is less competition in the multi-tenant market and often higher returns.  There are also few institutional buyers set up to acquire multi-tenant properties reducing the competition in this arena.
  3. Upside Potential – Lease terms are typically shorter on a multi-tenant property which allows for an opportunity to capture upside as lease rates increase.  Depending upon your opinion on the market and inflation in the coming years, this might be something to consider.  With a single-tenant property, lease rates are most often fixed.

With those advantages being stated, an investor also must mitigate those disadvantages associated with this type of investment which create those opportunities.  Those include more intensive management with more leases to administer, more responsibility for physical property maintenance, and tenant rollover.  These can typically be mitigated through competant 3rd party management but they are concerns nonetheless.

I am of the opinion that no one property type is best for all investors.  There are advantages to both single-tenant and multi-tenant properties considered here.  I do believe however, that there is wisdom in considering the alternative when the majority seems to be going one direction or the other.