Multi-tenant industrial properties have become increasingly attractive to investors looking for diversified income and exposure to growing demand from small and midsize businesses. Unlike a single-tenant warehouse, these developments can accommodate contractors, distributors, e-commerce companies, service providers, and light manufacturers within one location.
Multi-tenant industrial properties are typically developed as operating assets that can remain in their own cash flow streams for long periods of time. While they can provide diversified income and some higher potential for returns than single-tenant properties, there are risks associated with the development of a multi-tenant project. The property must be developed based on sound research, and the building must be designed with flexibility for future tenants.
Understand Local Tenant Demand
First, investigate the types of businesses that could possibly lease a facility of the proposed size and type in the area that you are considering for development. Even in good areas for development, there are typically some businesses that are better than others. For example, in many parts of the country, contractors and home-service-type companies such as plumbers, electricians, etc. can be very good tenants in industrial facilities, as can distributors of all kinds, including auto parts and other types of products. Also, on-line retailers can be excellent tenants in modern, well-located industrial facilities. Other types of industrial tenants could be businesses that involve light manufacturing or even service companies, such as repair facilities for industrial-type equipment. This list could go on and on, but you get the point.
Study the industrial vacancy rates, the current asking rent levels, industry growth, and existing buildings with available space in the target market to best understand the existing tenant demand for warehouse space in your target market and to determine if local companies need plain warehouse space or warehouse space with office, showroom, or light production space.
Those considering a purpose-built commercial flex space should also examine how unit dimensions, access points, utilities, and expansion options align with the needs of likely tenants. A property designed around assumptions rather than verified demand may struggle even in a growing market.
Review Zoning and Site Restrictions
Also important to look at when evaluating a potential property site for a multi-tenant industrial project is the zoning. Will the property allow for the type of businesses that are looking for space within the proposed development? Some cities have more restrictive zoning than others that will prohibit businesses such as a contractor’s or outdoor storage. Restrictions on signage, hours of operation, and the amount of traffic that a business would generate. In addition to the businesses that will be allowed at the property, restrictions on the number of units that can be developed on a site must also be looked at prior to purchasing the property and/or designing the building.
Investors should confirm allowable uses before purchasing land or finalizing building plans. Environmental requirements, stormwater management, fire codes, and access regulations can also affect construction costs and timelines.
Assess the local infrastructure, such as access to major roads, the space to turn around for deliveries, and the availability of good quality and reliable utilities and parking for employees and customers.
Prioritize Flexible Building Design
Divisible Units: Look for buildings with suites that can be subdivided and have independent entries. This is especially important for projects with a high vacancy rate, as large single suites will only attract a a few quality tenants. Even if a small suite is leased, it can be valuable, as it can be subdivided into two smaller suites to meet growing demand from existing tenants.
Unit size is key when it comes to flexibility. While very large spaces could potentially limit your pool of potential tenants, too small of a space could mean that the space isn’t big enough for a business to operate efficiently. By offering up several different sized units, you are able to market the space to a variety of different businesses and then be able to lease the space out to a single business as they grow and need more space. This makes for a highly flexible property that can offer a lot of different options to potential tenants.
Model Operating and Management Costs
Managing several tenants is more complex than managing one. Investors must account for common-area maintenance, landscaping, security, insurance, repairs, property management, and potential tenant turnover.
Model various lease scenarios and also address and model periods of partial vacancy. The way a tenant’s lease is structured with respect to charges for utilities, maintenance, taxes, etc. as well as charges for common areas, etc. needs to be very clearly defined. Also, in lease negotiations, an investor should have a good understanding as to what type of lease terms and structures various potential tenants are seeking. Additionally, an investor needs to model in periods of partial vacancy in order to project cash flows as well as returns on an expected basis.
Assess Long-Term Market Resilience
Whether in the short term or the long term, a multi-tenant industrial property is an operating asset. There is a lot of leverage built into a multi-tenant industrial property and the operating performance of the asset will depend on a variety of issues having to do with the location and the design of the property over time.
Strong multi-tenant industrial property investments come from solid market analysis, great design, cost management, and sound projections for cash flow.
