Single Tenant vs Multi Tenant: Pros and Cons for Commercial Real Estate
Whether you should buy single-tenant or multi-tenant commercial properties depends on your risk tolerance and investment strategy.
What is most important to you as a CRE investor: stable (and predictable) or flexible rents?
Your answer to this question (and similar ones) will determine whether you should focus on single-tenant or multi-tenant properties when designing your investment portfolio.
The single-tenant vs. multi-tenant commercial property debate cannot be settled absolutely. Both have pros and cons, making them appropriate for different types of investors, depending on their investment goals.
For example, with the former, you get longer leases with stable and predictable rents while the latter often involves shorter (and thus more flexible rents).
To help you make a smart decision, this article will cover the differences between single-tenancy and multi-tenancy commercial properties and the type of investors they appeal to. We’ll cover:
- What is a single-tenant commercial property?
- What is a multi-tenant commercial property?
- What is a multi-tenant vs single-tenant commercial property? Essential differences
- Single tenant vs multi-tenant commercial property: Pros and cons
- Single tenant vs multi-tenant commercial property: Which should you choose?
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1. What is single-tenant commercial property?
As the name implies, a single-tenant commercial property is occupied by a single tenant (or lessee).
Most single-tenant commercial properties have a single unit but some can have multiple units. However, irrespective of the number of units, only one tenant occupies them all.
The triple net lease (NNN lease) is often the most common lease agreement for single tenancy. With this lease, the tenant pays for utilities, property taxes, insurance, and maintenance costs, in addition to the base rent.
Some common examples of single-tenant commercial properties include pharmacies, industrial plants, e-commerce fulfillment facilities, convenience stores, car washes, warehouses, distribution centers, restaurants, and gas stations, among others.
Example of a single-tenant commercial property
Since they are occupied by a single lessee, the lease term tends to be longer with minimal turnover.
2. What is multi-tenant commercial property?
These properties have multiple units that are rented to different tenants (lessees). In most cases, you will have to enter into different (and unique) lease agreements with each tenant.
The lease agreement can be a gross lease (full-service lease), a modified gross lease, or a net lease.
With a gross lease, the tenant only pays the rent while you as the property owner will handle all commercial property operating expenses. A modified gross lease will have the tenant paying a base rent as well as the utilities and maintenance costs of their units.
Finally, a net lease agreement will require that tenants pay the base rent as well as a fixed portion of the operating expenses of the entire property.
Some common examples of multi-tenant commercial properties include shopping malls, industrial warehouses, office centers, multifamily apartments, healthcare centers, and retail strip malls, among others.
Example of a multi-tenant commercial property
Source: USA Prop Fund
Lease terms of multi-tenant commercial properties tend to be shorter, which provides you with more opportunities to increase rent.
3. What is multi-tenant vs single-tenant commercial property? Essential differences
Having covered the definition of the two property types, let’s highlight some critical differences:
Lease length
While single-tenant leases are longer (between 10 and 20 years), multi-tenant leases are often shorter (between three and seven years).
Lease type
As we have seen, the triple net lease is the most common lease arrangement for single-tenant properties. On the other hand, multi-tenant properties can have gross, modified gross, and net lease arrangements.
Vacancy and turnover
Since leases are shorter and there are many units, the turnover rate for multi-tenant properties is higher. Thus, there are multiple vacancies across the property’s useful life.
In contrast, single-tenant properties have very low turnover due to longer leases and single occupancy.
However, when there is a vacancy in a single-tenant property, they tend to take much time to fill. This is because a change of ownership often requires reconfiguring the property to fit an entirely different business (changing a pharmacy to a warehouse, for example).
This problem hardly surfaces with multi-tenant properties, hence vacancies are more quickly filled.
Predictability and flexibility
Longer leases mean predictable rents while shorter leases mean flexible rents.
Scalability
Businesses occupying a single-tenant property often scale up by moving to a bigger property. On the other hand, businesses in a multi-tenant property can do so by leasing more units.
Leverage
With single-tenant leases, your entire revenue stream is dependent on one tenant. If that tenant is responsible, you have hit the jackpot. But what if the tenant is irresponsible?
In essence, the concentration of your revenue stream means that the single tenant has greater leverage.
On the other hand, multiple-tenant leases provide you with a diversified revenue stream which shifts the leverage to you rather than a single tenant.
Property management
Managing a single-tenant property is less intense as you are dealing with a single person on a long lease. However, with multi-tenant properties, you are managing multiple tenants on shorter leases.
While you can be passive with single leases, multiple leases require a more active approach to property management.
4. Single tenant vs multi-tenant commercial property: Pros and cons
What then are the pros and cons of single-tenant vs multi-tenant commercial properties from an investor’s perspective?
Let’s start with the single-tenant variant:
Pros of single-tenant commercial properties
- Predictable revenue: Longer leases mean a predictable revenue stream that you can count on and plan for.
- Protection during market downturns: When rent falls during real estate market downturns (due to any of the common commercial real estate challenges), you don’t have anything to worry about. You have already locked in a stable rent for 10-20 years.
- No payment of operating expenses: The triple net lease puts the responsibility for operating expenses on the single tenant. The property owner is free from any ongoing responsibility.
- Easier (and even more passive) management: Managing a single tenant (in a long lease) who is also responsible for operating expenses is usually easier than the alternative.
- Higher occupancy rates: The length of the lease implies lower turnover and higher occupancy rates than multi-tenant properties.
Cons of single-tenant commercial properties
- Same rent even in market upturns: The length of the lease prevents you from increasing rent even when rent in the market of interest is increasing.
Any possible rent increase (to catch up with cost of living adjustments, for example) must be negotiated in the lease agreement. Aside from that preagreed increase, no other factor can compel a rent increase.
- Leverage is with the single tenant: As we have discussed above, the concentration of your revenue stream gives leverage to the tenant. You are entirely dependent on the good behavior of the single tenant.
- Longer vacancy period due to incompatibility: If the occupant does not renew, it might take time to find a new tenant willing to lease the property as it is. For example, waiting to get another pharmacy that will use the space vacated by another pharmacy will likely take time.
- Revenue loss: A longer vacancy period results in a loss of revenue. Unlike multi-tenant properties, a single-tenant property is either occupied or not.
- High cost of changing tenants: If you don’t want to wait to get another pharmacy, you will have to spend money modifying the space to make it appropriate for another tenant.
Pros of multiple-tenant commercial properties
- Shorter vacancy period: Though turnover is higher and vacancies occur more frequently, the vacancy period is shorter. Filling up vacant units often takes less time than finding a new tenant for a whole property.
- Steady income: Even when a unit is vacant, you will still receive income from the occupied ones. Unlike single-tenant properties, there is hardly a period where your revenue is zero.
- Possibility of higher rents: Since leases are shorter, there is more chance of increasing rents in keeping with new market conditions.
- Scalability: Businesses that are expanding can lease more units instead of moving to a new space.
Cons of multi-tenant commercial properties
- Rent can be reduced in market downturns: Just as shorter lease terms can lead to higher rents in market upturns, it can force lower rents in market downturns.
- The costs of high turnover rates can accumulate: Every time there is a vacancy, you need to spend money to get a new occupant – marketing, advertising, brokerage, and tenant improvement costs.
If the turnover rate is too high, these costs can add up and reduce your profits.
- You share in the property’s operating expenses: Most lessees of multi-tenant properties prefer gross leases. As we have seen, with gross leases, you are responsible for the property’s operating expenses.
Even if you get tenants to agree to a modified gross lease and a net lease, you will still be responsible for some expenses.
- Require more active management: Managing multiple tenants is more demanding. If you do it yourself, it will be time-consuming and if you employ a property manager, that means extra costs.
5. Single tenant vs multi-tenant commercial property: Which should you choose?
So, there you have it, the differences between single-tenant and multi-tenant properties and the pros and cons of each.
We are now back to where we started: which of these options should you prefer as an investor?
The simple answer is that both are fine. It all depends on the type of investor you are and your investment goals.
Let’s consider factors to consider before choosing a side in the single-tenant vs multi-tenant debate:
Are you an income or growth investor?
Income investors prioritize consistent and regular income streams (predictability) while growth investors focus on how quickly they can increase the cap rate by increasing rent (flexibility).
Which of them you prefer will depend on your commercial real estate investment strategy. Income investors will prefer single tenancy while growth investors will favor multi-tenancy.
Are you a passive or active investor?
If you don’t want to be involved in the management of the property, a single-tenant lease is better. You don’t pay operating expenses, prepare new leases frequently, or regularly seek new tenants.
On the other hand, if you desire to be actively involved, a multi-tenant lease is more appropriate.
Which risk is most significant?
The main risk with single-tenant properties is inflation risk – the risk that the rent you are collecting won’t keep up with inflation.
You can manage this by agreeing to regular cost-of-living adjustments or increases in the lease agreement.
However, since the lease period is long, you can’t negotiate higher rents until the lease expires even if current market conditions demand it.
The other risk is the longer vacancy period when you can’t find a new tenant who can use the property as it is. During this period, you will earn zero revenue.
Finally, there is concentration risk – the risk of depending on a single business for your revenue.
For multi-tenant properties, there is the risk of not finding new tenants for a vacant unit on time, underestimating operating costs, and lower rents during market downturns.
When choosing between these two options, you have to decide on the type of risks you are more willing to embrace.
What is your risk tolerance?
Though both property types have their risks, single-tenant properties tend to be the preference of risk-averse investors while risk-seeking investors stick to multi-tenant properties.
This is often because many investors focus on market risk.
With a longer lease, you are less exposed to market risk and can lock in a stable rent for a long time. However, shorter leases mean the rent you will get depends on whether we are in favorable or unfavorable market conditions.
Risk-averse investors will choose the former while risk-seeking investors will embrace the latter.
Wherever you land in the single-tenant vs multi-tenant discussion, you will still pay earnest money deposits before you can purchase any type of commercial property.
In the competitive world of commercial real estate, having a steady source for earnest money deposits can help you get ahead of the competition and build your portfolio faster.
At Duckfund, we provide you with earnest money deposit financing for all your CRE deals. You can complete the application in 2 minutes and get the funds transferred to an escrow account within 48 hours, all without submitting any credit report.
[What are you waiting for? Sign up for Duckfund today to secure earnest money deposits for single-tenant and multi-tenant properties of your choice.]
Takeaways
- A single-tenant commercial property is one occupied by a single tenant under a triple-net lease agreement.
- A multi-tenant commercial property has multiple units occupied by multiple tenants with different lease agreements (can be gross, modified gross, or net).
- Single-tenant leases tend to be longer, providing stable revenues and lower turnover rates. On the other hand, multi-tenant leases are shorter, providing opportunities to increase rent more frequently.
- When choosing between single-tenant and multi-tenant properties, you need to consider your investing strategy (income or growth), the type of risk you want to embrace, and your risk tolerance.
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