Commercial real estate presents investment opportunity in a variety of formats. Investors typically decide between either a single tenant net lease property or a multi-tenant net lease property. As both types of investment opportunities offer several pros and cons, preference is often circumstantial. Below is an in-depth analysis and comparison—read on to enhance your understanding of single and multi-tenant net leases.
What are single and multi-tenant net leases?
A single tenant net lease is a rental agreement between the sole occupant of a one-unit space and its owner or landlord. A multi-tenant net lease is a rental agreement between several occupants or renters in a larger, multiple-office property. Net leases require the tenants to assume responsibility for some or all of the additional costs associated with a commercial property on top of the agreed-upon rent. Accordingly, net leases are popular types of rental agreements in commercial real estate, as they benefit both the tenants and the landlords. Different forms of net leases, such as single, double or triple net leases, entrust the occupants with incrementally increasing responsibilities, which gives landlords and tenants an array of choices for various scenarios.
Single Tenant Net Lease: Pros and Cons
Single tenant net lease properties are often appealing to first-time investors because of their simplicity. With only one tenant to attend to, the management requirements are far less demanding. Single tenant net leases also typically average between 10-20 year terms, which is advantageous for long-term budgeting and planning. Additionally, single tenant commercial real estate agreements are very often designed as triple net leases, which almost entirely alleviate the landlords of property obligations.
However, investing in a single tenant property relies heavily on the quality of the sole tenant. If the occupant’s business fails or encounters financial trouble, the investor’s primary source of income is significantly limited if not eliminated. A completely vacant property has a detrimental impact on a commercial investment. Aside from losses associated with the vacancy itself, upkeep, improvements, insurance and other affiliated costs begin to diminish overall return rates until a new tenant is found.
Multi-tenant Net Lease: Pros and Cons
As multi-tenant net leases rely on a multitude of occupants, the likelihood of total vacancy is very low. Multi-tenant net leases typically average seven years, which leaves room for relatively frequent adjustments. Additionally, investors lean toward a multi-tenant property because they prefer to close on several units at once instead of several individual endeavors. This approach is often perceived as more efficient and more economical, as it reduces transactional closing fees and procedures.
Contrarily, a multi-tenant property also signifies increased duties and responsibilities. Multiple occupants require more active management due to specialized, individual needs. Furthermore, these properties are often considered a higher-risk investment, as they are more susceptible to significant value loss during an economic downturn and also require periodic capital contribution for maintenance or improvements. These risk factors combined with the typically higher turnover rate of multi-tenant property occupants result in higher interest rates from lenders.
Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!