Multi-Tenant Retail on the Rise
Terrydale Capital
Aug 25, 2021 16 Min read
In recent times, we've seen a surge in private investors branching out from single-tenant retail and expanding into multi-tenant retail assets. The uptick in the transition can be attributed to familiarity – the general rules apply to both investments. It can also be due to investors having a solid foundation to build from.
Who Invests in Multi-Tenant Retail Assets
Multi-tenant retail assets are ideal for:
Investors Looking To Lease For The Short Term
With multi-tenant retail real estate, lease terms are shorter – about three to seven years. That allows the investors to capitalize on raising rental rates when the market is rising.
Investors Looking For A Diverse Tenant Base
As the name suggests, multi-tenant retail real estate allows for a varied and resilient tenant base. The diverse tenant base translates to a low probability of 100% vacant at any one time, making it appealing to investors.
Investors With A Preference For Hands-On-Day-To-Day Property Management
Multi-tenant retail real estate requires active management in terms of common area maintenance and improvements. This provides investors a chance to inspect and care for their investments. Besides, the hands-on management may provide tax benefits beyond business deductions and depreciation – which can be appealing to investors.
Growth-Oriented investors
Multi-tenant retail investments provide an opportunity to quickly grow rental income – especially during the upturn of the real-estate cycle. Their propensity for returning above average profits appeals to many investors.
Why Multi-Tenant Retail Investment Assets
You should consider investing in multi-tenant retail assets for the following reasons:
Low Risk Of A 100% Vacancy
Acquiring multi-talent retail assets lets you enjoy better diversification and yields in a single investment. They; thus, mitigate the risk of a 100% vacancy associated with their single-tenant counterparts.
The reason is a multi-tenant asset houses retailers selling products and services from a wide range of industries. Given the low chance of all industries experiencing a downturn at the same time or in equal measures, a multi-tenant retail investment can better survive recessions than its single-tenant counterparts. (Hence if a tenant in a given industry goes out of business, you can collect rent from a different tenant in an industry that's more stable during a recession.
Further still, there are countless retail businesses in existence – hundreds of small to medium retail businesses are opened daily. That makes it easier to fill vacant positions – especially in the upturn cycle of real estate.
Probability of Better Value For Everyone Involved
Despite the short lease terms associated with multi-tenant retail assets, the right mix of tenants can create opportunities to add value for all parties. It can also create "stickiness" to the location. Think of a shoe store combined with a women's fashion retail store and a jewel store. These stores provide complementary products in a less competitive environment.
Thus, either of these stores is likely to draw value from its neighbor. The added value can trickle down to the two tenants retaining their stores longer, which reduces tenant rollover and the associated costs.
A Better Chance To Survive The E-Commerce Wave
The right mix of retailers is not only essential for the center's value but can also help the investor survive the transition in the retail world driven by e-commerce.
Currently, investors are paying attention to service-based retail stores that are internet-proof. Think of nail salons, medical centers, restaurants, and fitness centers. Their internet-proof nature help investors overcome their concerns of losing investment to changing consumer behavior.
With that in mind, a multi-tenant retail asset provides the opportunity to accommodate more internet-proof businesses, while still benefiting from stable product-based retail stores.
Thinking critically; however, retail is not going away, it's just changing.
(Remember Sears started selling out of a catalog only to open retail stores. Amazon seems to be set on a similar path.)
Today's consumer wants it all. The flexibility associated with on-demand purchases, the ability to touch and feel their orders, the discounts offered by e-commerce stores, and more. They want more value and a better shopping experience.
As such, any investor who strives to ensure their multi-tenant retail asset possesses the right mix of experiential value and shopping will most likely survive the "retail-apocalypse). Besides, it also boils down to the quality of the tenants and properties. For example, retail properties with future-proof entertainment avenues, dining establishments, and similar attractions are likely to keep more foot traffic than those dependents on the strength of respective anchor tenants.
Better Redevelopment Options
It's no secret that investors are after investment-grade retailers highly resistant to e-commerce and recession disruptions. They want to lease to essential physical retailers like grocery, convenience, pharmacy, dollar, tire and auto service, and home improvement stores. But that only increases competition in those sectors.
To survive the competition, an investor can choose to re-develop their property than go the obvious route. For instance, an investor can sample the troubled anchor store for redevelopment options. Redevelopment is particularly easy in cases of department stores, large lifestyle centers, theaters, and malls. As you can leverage the large size, ample parking, and desirable locations to transform the spaces into power centers or multifamily properties.
Lenders Have a Competitive Appetite for Multi-Tenant Retail In 2021
As we emerge from the pandemic, lenders have a high preference for lending to multi-tenant retail investors. That makes it easy to obtain higher (up to 75%) LTVs.
And considering the high potential of diversifying multi-tenant retail assets, you can repay the loan in a record time. As mentioned earlier, a diverse range of tenants with different lease types and durations, different lease structures, and in different industries can help lower risk and boost the minimum income expectations.
Pros of Multi-Tenant Retail Real Estate
Given the flexibility, simplicity, and diversity associated with multi-tenant retail assets, they have many upsides. Such benefits include:
1. Competitive Lending Structures
Multi-tenant retail assets enjoy favorable lending structures compared to other assets, like residential real estate. With lenders having a competitive appetite for these assets as they emerge from the pandemic, investors can obtain higher LTVs (up to 75%).
Investors can also enjoy maximum leverage in major markets with these assets. As such, you can build amortization in the short-term, equity in the long term, and generate cash flow with borrowed money.
2. 10 Year Fixed Terms Available
Investing in multi-tenant retail assets provides a chance for the investor to enjoy benefits associated with 10-year fixed terms.
As such, your portfolio gets protection against an increase in interest rates for 10 years, which proves cheaper in the long run. You're also certain that any refinancing will be constant throughout the lending duration.
3. Stable Income Producing Assets
The diversification potential of multi-tenant retail assets saves you from "putting all your eggs in one basket."
You can easily follow market trajectories or areas of growth like e-fulfillment warehouses and adapt accordingly.
4. Easier To Lease On NNN Leases
You can easily lease your multi-tenant retail assets on absolute-triple net leases. That will, in turn, relieve you from most landlord responsibilities.
In NNN leases, tenants are responsible for insurance, taxation, and common area maintenance. Even if the tenants disagree with the NNN leases, they still cover some maintenance costs.
5. Renting To Income Producing Businesses
Retail businesses generate cash flow, which makes them less likely to default on a lease.
Retail businesses also have better disruption-based contingency plans than families. They can also access emergency credit to remain afloat amid a recession easier than a family.
And when it comes down to it, it's more socially acceptable and easier to evict a retail business that defaults the lease agreement – than it is to evict a family.
Cons of Multi-Tenant Retail Real Estate
Multi-tenant retail assets are not void of downsides. Their cons include:
1.Higher Management Costs
Multi-tenant retail assets are more hands-on day-to-day property management than their single tenant counterparts. The diverse nature of the tenants also adds to the managerial responsibilities. Think of operating on different payment options, managing different leases, and responding to different emergencies. Added to that are the short-term lease and its associated risks. All these management responsibilities lead to more management costs.
2.Incubator-Style Is Typically Gross Lease, Not NNN
In multi-tenant retail assets, tenants pay the gross lease. That is, they do not pay for secondary expenses like maintenance, insurance, and taxes. That responsibility falls on the landlord (you the investor). Therefore, you must perform proper estimation to ensure all these costs are included in the rent- lest risk incurring losses.
When to Invest in Multi-Tenant CRE?
Notably, you must consider your investment goals, lifestyle, and personal risk tolerance before buying multi-tenant retail assets. Next, partner with an expert advisor who understands the market enough to see through the hype and get you to the right investment.
When you're ready for the most competitive financing structure in the market for your multi-tenant retail deal, contact Quinn Conway at Terrydale Capital.
Then Again, Why Wait When You Can Start Today
There are opportunities in multi-talent retail assets. But you can only benefit from the opportunity when you take action.
So why not get a quote today? Mention code "RISE" to get a free appraisal cost waiver with Terrydale Capital financing. We offer:
- 5-10 Year Fixed Terms
- Up to 30 Years Amortization
- Rates as low as 5% (5.5% average)
- TI&LC's Included in Loan
- Flexible Prepays
Partner With Terrydale Capital for Your Debt Financing Needs
When it comes to debt financing, understanding the right timing, process, and options is crucial. At Terrydale Capital, we provide a comprehensive range of commercial loan solutions tailored to meet your business's unique needs.
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