When investing in commercial real estate, one of the most important decisions to make is whether a property will be leased or rented to a single tenant or split up into multiple spaces. In the wake of the COVID-19 pandemic, there has been a movement toward single-tenant properties. Before taking this approach, it is critical to consider the pros and cons of such a setup.
The Benefits of a Single-Tenant Property
At first glance, it might seem that a multi-tenant property would be a better option than a single-tenant, as a multi-tenant property could bring more money in if all the units available are rented or leased. However, single-tenant properties have their advantages too.
One of the biggest advantages of a single-tenant property is the ability to lease it to a corporation under a triple net (NNN) lease. In an NNN lease, which typically has a term of 10 to 20 years, the tenant pays the net amount of taxes, common area maintenance charges, and insurance. Property owners benefit greatly from an NNN lease, as the tenants are typically stable corporate partners, such as big-box stores, gas stations, or dollar stores. There is little worry that the corporation will miss a payment or a check will bounce. Their corporate backing also protects you from major expenditures on maintenance or emergency repairs.
Regular rent increases are built into an NNN lease, as well, so there is no need to haggle. The amount of regular maintenance is almost nothing, so you don’t have to continuously monitor the unit. NNN leases provide security and peace of mind for property owners at very low risk.
Even if you are unable to secure a NNN lease from a major corporation, the single-tenant method may still be the best way to go. Because there is only one unit, the odds of it sitting unused are much less than those of a multi-tenant property, where it may be difficult to fill all the units available. Along the same lines, with a single-tenant property, there are no common shared areas like parking lots or lobbies that you will need to maintain. This sort of maintenance can be extremely costly, so avoiding it is a huge plus.
Potential Drawbacks of a Single-Tenant Property
Of course, any real estate investment can be risky. Depending upon the tenant, the financial risk of late or missed payments can be larger than that of a multi-tenant property. With the latter, even if one or more tenants have payment problems, there is still some income coming in from the more reliable tenants. But if a single tenant has problems paying, then no money comes in at all.
Single-tenant properties also tend to have the lowest returns, typically 3.5 percent to 5.5 percent. This is the downside to the security provided by an NNN lease. If you need the property to perform better than that, it is probably a better idea to look into multi-tenant options.
A single-tenant property’s value suffers as the long-term lease gets closer to its end. If you have no intention of selling the property, it is not a huge issue, but if you are looking for a turnaround, it can affect the bottom line of a sale considerably.
Some property owners prefer a hands-on approach to their properties. They like to be involved in the regular maintenance of the property and keep an eye on what’s happening onsite. These owners will be highly disappointed by a single-tenant property, especially one with a major corporate client. These types of properties require little to no regular effort from the owner, and many corporate tenants will greatly resent any interference in the everyday operations of their business.
Lease renewals, while infrequent, are much more of an issue in single-tenant than multi-tenant properties. Because of the risk of the property sitting unused for an extended period, property owners need to be very proactive about lease renewals. This may require negotiation with the tenant over improvements to the property, which could be very expensive, depending on the needs and desires of the tenant. Additionally, corporations tend to work on their own timelines and may not wish to make renewal decisions when you want them to. This can lead to many anxious moments.
Final Thoughts
Overall, single-tenant properties offer considerable advantages over multi-tenant properties. There is less risk involved and, once a long-term lease is signed, steady income. The fact that little regular maintenance needs to be done is a huge benefit as well. If the right tenant can be found, single-tenant may be the best route to go.