This post originally appeared on SimonCRE Insights Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
In the ever-changing landscape of commercial real estate, multi-tenant retail properties stand as a compelling investment opportunity throughout the country. These properties have garnered attention from buyers and investors thanks to the multiple advantages they carry. As the economy continues to rebound from the economic downturn in the wake of the pandemic, the appeal of multi-tenant retail has only grown more pronounced as tenants look to grow their businesses and expand their store footprints.
Reason 1: Versatility and Flexibility
Dynamic and Customizable Spaces
Multi-tenant retail centers have become increasingly popular among investors due to their versatility and flexibility. These properties offer dynamic and customizable spaces that can easily accommodate different business types and needs. One of the key benefits of these spaces is the flexibility in design and layout. Unlike single-tenant properties, multi-tenant retail centers can be customized to meet the specific requirements of each tenant.
This flexibility allows tenants from various sectors—be it dining, fashion, or professional services—to coexist comfortably. The malleability of these spaces makes it easier to adapt them to different business types and their individual needs, offering a one-size-fits-many approach for a range of potential tenants.
Holistic Design Creates Healthier Centers
Taking a holistic approach during the design of multi-tenant retail centers can also greatly contribute to their appeal to investors as well as tenants. By designing and leasing the center at the same time, oversaturation of specific retail uses can be prevented. This means that tenants do not have to compete with each other directly but instead can benefit from the business that each other brings to the center. This creates a healthier and more harmonious environment for all tenants.
SimonCRE employs this type of holistic approach during our development process, designing and leasing centers at the same time. This allows us to prevent direct competition between tenants and instead create centers that are prepared for long-term success upon opening.
Meeting Market Demands
Multi-tenant spaces are well-suited to adapt to changing consumer preferences. For example, as e-commerce continues to grow, we are seeing a shift towards more experiential retail in brick-and-mortar stores. Multi-tenant centers can easily accommodate this trend, offering a variety of options for consumers to dine, shop, and play.
This is particularly important as the economy goes through shifts and fluctuations. These spaces offer resilience and can more easily accommodate tenants in changing markets, ensuring that operators can continue to thrive even during challenging times.
Reason 2: Risk Mitigation
Diversification of Revenue Streams
One of the key advantages of multi-tenant retail centers is the ability to generate stable and diverse income streams. With multiple tenants coexisting at the same property, investors have the opportunity to benefit from a diverse roster of tenants contributing to their revenue. Whether an investor acquires the space for a single tenant or multiple tenants within a center, the success of each tenant can directly improve the operations of the surrounding tenants. This diversification helps to mitigate the risk of relying on revenue from a single operator and reduces the impact that the failure or closure of one business can have on the overall financial performance of the property.
Multi-tenant retail centers often attract national credit tenants, which adds an extra layer of stability to the investment. These tenants typically have established brands and strong financial standing, making them more likely to honor long-term lease commitments and pay their rent. The presence of national credit tenants also increases the chances of attracting customers to the center, leading to increased foot traffic and enhanced visibility for all tenants. Longer leases and dependable income from stable tenants contribute to the overall risk mitigation strategy for investors. Their established brand names also draw more foot traffic, which benefits smaller tenants in the center.
Historically, multi-tenant retail centers have demonstrated resilience during various economic cycles. Their unique structure encourages more foot traffic and mutually beneficial tenant relationships, providing a stable foundation even in turbulent times. The diversified tenant mix and the mutually beneficial relationships among tenants within the center contribute to this resilience. Additionally, multi-tenant retail centers have the potential to adapt to changing market demands, ensuring their ongoing success and mitigating the risk of obsolescence.
Reason 3: High Return on Investment (ROI)
When it comes to ROI, multi-tenant retail centers often outperform other types of commercial real estate investments, including single-tenant retail investments. Multi-tenant retail centers provide attractive yields for investors of varying levels, and the income generated from multiple tenants contributes to a stable income stream. With various businesses operating within the center, there is a diversified revenue stream, reducing the risk that can be found during the ownership of isolated, single-tenant assets.
Competitive Cap Rate Availability
Since properties in these centers are developed holistically and then parceled off when selling to new investors, it allows for a more flexible range of prices and cap rates. This flexibility enables developers like ourselves to work with potential buyers to find the right price point that aligns with their investment goals. By offering competitive cap rates, multi-tenant retail centers become more appealing to investors seeking favorable returns.
According to a recent report by the National Association of Realtors (NAR), the average cap rate for multi-tenant retail centers in the United States is 6.5%. This is significantly higher than the cap rate for other types of commercial real estate, such as office buildings (5.5%), industrial properties (4.5%), and multi-family properties (4.92%). In a more direct comparison, Single-Tenat Net Lease Cap Rates for Q2 of 2023 averaged out at 5.95%, still considerably lower than the rate for multi-tenant retail centers.
Current market trends indicate a promising future for the retail sector, especially for multi-tenant retail centers, which have significant growth potential. As the economy rebounds and consumer spending increases, these centers are well-positioned to capitalize on the growing demand for retail. The long-term stability of multi-tenant retail centers ensures that investors can enjoy sustained growth and capital appreciation over time. The retail market is expected to grow further in the coming years, driven by factors such as population growth and rising incomes.
In recent years, notably starting in late 2020, the overall availability rate of retail has declined to a record low of 4.8% as of Q2 of 2023. During this same time period, average rental rates have continued to grow, with the average asking rent rate hitting $23.21 per square foot in Q2 of 2023. On a year-over-year basis, average asking rent is currently up by 2.1%. Additionally, neighborhood and community retail centers saw the largest year-over-year rent gain, at an increase of 2.7%. As rental rates continue to grow and the availability of retail space in these markets continues to dwindle, the earning potential of existing centers is positioned to continue to grow in viability.
Reason 4: Strategic Location & Development Opportunities
Location is paramount in the commercial real estate sector. At SimonCRE, our methodology for choosing profitable locations prioritizes demographic analysis and future growth prospects when identifying a location for a future center.
The selection of a strategic location for a multi-tenant retail center is crucial to its future success. The location determines the potential customer base, accessibility, and visibility of the center. Therefore, a thorough analysis of the local demographics, market trends, and competition is essential in choosing an appropriate location.
Multi-tenant retail centers not only contribute to the local economy but also enrich the social and cultural fabric of the community. The growing demand for retail in suburban areas is an additional reason why these centers make for a smart investment.
The growing demand for retail in suburban locations further reinforces the importance of strategic location and development opportunities. As population centers expand and suburban areas become more densely populated, multi-tenant retail centers play a vital role in meeting the needs and preferences of these communities.
BRENDAN JOST >
Acquisitions & Dispositions Manager
Brendan Jost serves as the Acquisitions & Dispositions Manager at SimonCRE. He plays a vital role in the day-to-day management of the company’s disposition pipeline and investment sales team.