Should You Invest in Multitenant Industrial Properties?

Multitenant industrial property is one of the lesser known property types, especially among new investors. Multitenant industrial properties typically comprise a variety of small spaces, spread across numerous buildings, all of which are located within an industrial business park.

What this asset class lacks in notoriety it makes up for in opportunity. While the market for single-tenant industrial properties is consistently frenetic, putting those assets out of reach for many non-institutional investors, smaller multitenant industrial properties represent a unique opportunity for independent investors to acquire an industrial asset.

Some of the key attributes offered by multitenant industrial properties are:

• Abundant value-add opportunities.
• Minimal lease-up costs.
• Resilient and varied tenant base.
• Potential for rental increases.
• Attractive investment size and returns.
• Multiple exit options.

The majority of multitenant industrial properties were built during a time period stretching from the 1970s to the 1990s, making them, on average, 30-50 years old. Accordingly, many of these properties require modernization and capital improvements. In addition, because multitenant properties are inherently more management intensive — requiring additional time and energy to oversee multiple tenants, lease units and maintain common areas — many of these assets have been historically mismanaged by apathetic landlords and disconnected investors.

These challenges require both financial wherewithal and diligent oversight; but if an investor is in possession of both those qualities, these obstacles also make multitenant industrial properties ideally suited to those seeking value-add opportunities. In a value-add opportunity, investors make capital and management improvements to a property in order to increase net operating income and augment residual value.

Modernization upgrades in multitenant industrial properties can take many forms, including enhancing the exterior of the property through creative façade improvements and installing new landscaping elements, as well as making interior upgrades, such as polished concrete flooring, luxury vinyl tile and creative office installations for flex spaces.

With regard to successful leasing and property management, it is advisable to implement a process that enables maximum lease velocity and builds relationships to drive high renewal rates. Many landlords are digitizing the leasing process, whereby availability information, 3D virtual tours and space measurements can all be conducted or obtained online. It can also be beneficial to arrange in-person tours in an “open house” format to show the space to multiple prospects simultaneously. These approaches can substantially minimize the time and energy required to market and lease the space, while also increasing occupancy rates at the property.

As a result of high construction costs and a lack of available land, replacement cost for industrial properties is significant in most major U.S. industrial markets. Thus, multitenant industrial properties are in short supply and there are virtually no new developments of this type underway. This lack of new supply fosters an overabundance of demand, and improved properties are likely to be well received by the market and met with notable interest from numerous prospective tenants.

After one-time capital improvements are made, the industrial components, which represent the vast majority of the asset, usually require minimal renovations between tenants. Most multitenant industrial properties have a modest office component, which lends itself to being renovated in advance of finding a new tenant for the vacant space. This means that the majority of pre-leasing activity consists of merely cleaning, flooring and paint. This results in decreased lease-up time, with tenants often touring space, signing a lease and obtaining access (and paying rent) in a matter of days, instead of weeks or months.

Additionally, small tenants are less likely to utilize commercial real estate brokers and will frequently find space through online resources, local advertisements and inquiries to neighborhood property managers. Consequently, owners of multitenant industrial properties can usually forego hiring a third-party leasing agent and are unlikely to face noteworthy brokerage costs from tenant representatives.

The tenant base within a multitenant industrial property usually comprises a variety of small service businesses, branch locations and users that support larger manufacturers and distributors. This diversity of tenants cultivates rent roll resilience, because it is unlikely that any single circumstance will impact the full spectrum of tenants at once.

The typical size of each tenant space is usually 1,000-10,000 square feet, and in most multitenant industrial properties, no single user represents more than 10% of the asset. If one of your tenants is experiencing financial distress or relocates, the impact to your property’s cash flow will be relatively minimal.

When it comes to driving value within multitenant industrial properties, investors frequently benefit from a relatively short lease term, usually two to three years, compared to larger tenants, which usually seek lease terms with a minimum of five years. This shorter lease term provides an attractive balance between rent roll stability and market agility, enabling an investor to increase rents as the market dictates — a particularly notable advantage in the currently fast-paced industrial market.

In the Southern California industrial markets, large leases (greater than 10,000 square feet) experienced annual average rent increases of approximately 3% since 2014, while the overall industrial market averaged 7% increases during the same time period. This discrepancy suggests that owners of smaller multitenant properties were more easily able to increase rents to reflect market conditions, i.e. mark to market, resulting in a corresponding escalation in net operating income.

The majority of multitenant industrial properties are valued at under $20 million. These properties have not attracted strong interest from institutional entities, which means they have also not been subject to the kind of cap rate compression that has plagued much of the industrial market. With their minimized acquisition costs and potentially strong returns, these properties are well-suited to individual investors, entrepreneurs and syndicators.

Another appealing feature of multitenant industrial properties is that they offer investors a variety of exit options. In addition to a conventional sale of the entire property to another investor, owners can, alternatively, enhance their return by converting each unit into its own distinct industrial condominium and then disposing of the individual units to separate end users. By purchasing the property at a “wholesale” investor price, and then selling each unit at a “retail” rate, a creative investor can capitalize on the market cycle and maximize their profit.

While multitenant industrial properties offer many notable advantages, it is also important to note that — like any value-add property — they often require upfront capital expenditures and strategic oversight. Furthermore, as with any multitenant property, these assets will likely necessitate more ongoing management and leasing attention than single-tenant properties. Those caveats notwithstanding, these properties can represent a compelling, and often overlooked, opportunity for investors.

If you’re persuaded that this asset class may be appropriate for your needs, searching on LoopNet can be a great way to identify available properties. Contacting an experienced industrial real estate broker will also help you source off-market opportunities. A knowledgeable broker can save you time and money, while also mitigating your risk by underwriting the property, identifying leasing opportunities and determining the right tenant profiles for the specific spaces available within your property.