Why Multi-Tenant Industrial Outperforms Single-Tenant Investments

In the world of industrial real estate investing, a fundamental question often arises: should you invest in a single-tenant property with one large, creditworthy tenant, or a multi-tenant property with multiple smaller tenants?

While single-tenant net lease properties have their merits—predictable income, minimal management, and often investment-grade credit—multi-tenant industrial properties have consistently delivered superior risk-adjusted returns over full market cycles. Here's why.

The Multi-Tenant Advantage: Diversification

The most compelling argument for multi-tenant industrial is diversification. With a single-tenant property, your entire income stream depends on one tenant's ability and willingness to pay rent. If that tenant struggles financially, seeks a rent reduction, or vacates at lease expiration, you face 100% income loss overnight.

Multi-tenant properties spread this risk across multiple tenants. A typical 30,000 SF multi-tenant industrial building might have six to ten tenants, each paying rent independently. If one tenant vacates, you lose perhaps 10-15% of your income—a manageable situation—while the remaining tenants continue paying.

"I've seen too many investors learn the hard way that a 'safe' single-tenant property with a creditworthy tenant can become a nightmare when that tenant exercises an early termination option or simply decides not to renew. Multi-tenant diversification is real protection."

Superior Rent Growth Potential

Multi-tenant industrial properties typically deliver stronger rent growth than single-tenant assets for several reasons:

Staggered Lease Expirations

With multiple tenants on different lease terms, you have regular opportunities to mark rents to market. In a rising market, this means capturing rent growth every year rather than waiting for a single lease to expire in five or ten years.

Small Tenant Pricing Power

Small and mid-size industrial tenants—typically businesses occupying 2,000 to 10,000 square feet—have fewer options in most markets. Large distribution centers compete for the same handful of 100,000+ SF tenants, but small-bay space faces less institutional competition, giving landlords more pricing power.

Higher Per-Square-Foot Rents

Small-bay industrial space commands significantly higher rents per square foot than large-format distribution space. While a 200,000 SF distribution center might lease for $0.80/SF NNN, a 5,000 SF bay in the same market might command $1.40/SF NNN—nearly double the rate.

Institutional Capital is Catching On

For decades, institutional investors overlooked multi-tenant industrial in favor of larger, "institutional quality" single-tenant distribution facilities. That's changing rapidly.

Major private equity firms and REITs have increasingly targeted multi-tenant industrial portfolios, recognizing the superior risk-adjusted returns this asset class delivers. This institutional interest has compressed cap rates and validated the investment thesis, but the asset class remains less competitive than trophy single-tenant distribution centers.

The Management Trade-Off

Multi-tenant industrial does require more active management than single-tenant properties. With multiple tenants, you'll handle more lease renewals, tenant improvements, and day-to-day property management issues.

However, this management intensity creates value in several ways:

• Higher returns: The additional work justifies higher returns—if it were easy, everyone would do it
• Barrier to entry: Less sophisticated investors avoid management-intensive assets, reducing competition
• Value-add opportunities: Active management allows you to improve operations, increase rents, and reduce expenses
• Scalable with property management: Professional property management can handle operations cost-effectively

For investors willing to be slightly more active—or to pay for professional management—the returns more than compensate for the additional effort.

Ideal Multi-Tenant Industrial Characteristics

Not all multi-tenant industrial properties are created equal. When evaluating investments, look for these characteristics:

Location

Proximity to population centers, major transportation routes, and a diverse economic base. Properties near residential areas tend to attract service-oriented tenants with stable demand.

Building Configuration

Flexible bay sizes that can be combined or subdivided, adequate parking ratios (at least 2 spaces per 1,000 SF), drive-in doors for each unit, and ideally some dock-high loading for larger bays.

Tenant Mix

Diversified tenant base across multiple industries—construction trades, distribution, light manufacturing, automotive services, and professional services. Avoid over-concentration in any single industry.

Below-Market Rents

The best acquisitions feature in-place rents below current market rates, providing immediate upside as leases roll. Look for 10-20% spreads to current market rents.

The Bottom Line

Multi-tenant industrial properties offer a compelling combination of income diversification, rent growth potential, and favorable supply-demand dynamics. While they require more active management than single-tenant net lease investments, the superior risk-adjusted returns reward investors who are willing to do the work.

For investors seeking stable, growing income from industrial real estate—particularly in supply-constrained markets like the East Bay—multi-tenant industrial deserves serious consideration.

Alex Peck

Principal at Lee & Associates East Bay, specializing in multi-tenant industrial properties throughout the East Bay and Solano County markets.

apeck@lee-associates.com · (925) 239-1414