While the commercial real estate landscape is constantly changing, multi-tenant retail properties have become attractive investment opportunities across the country. These properties have attracted the attention of buyers and investors due to a variety of benefits they offer. As the economy continues to recover from the post-pandemic recession, multi-tenant retail is becoming more attractive as tenants look to expand their operations and add more storefront space.
Reason 1: Versatility and flexibility
Dynamic and customizable spaces
Multi-tenant retail centers are becoming increasingly popular among investors due to their versatility and flexibility. These properties offer dynamic, customizable spaces that can easily accommodate a variety of business types and needs. One of the main 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 a variety of sectors, including food and beverage, fashion and professional services, to coexist comfortably. The flexibility of these spaces allows them to be easily tailored to suit different business types and individual needs, providing a one-size-fits-all approach to a range of potential tenants.
Holistic design creates healthier centres
Taking a holistic approach when designing a multi-tenant retail center also goes a long way in making it more attractive to investors and tenants. Designing and leasing the center simultaneously helps prevent oversaturation of any particular retail use, meaning tenants do not have to compete directly with each other but can instead benefit from the business each brings to the center. This creates a healthier, more harmonious environment for all tenants.
SimonCRE takes this holistic approach to the development process, designing and leasing centers simultaneously, preventing direct competition between tenants and positioning centers for long-term success once open.
Meeting market demand
Multitenant spaces are well-positioned to adapt to changing consumer preferences. For example, as e-commerce continues to grow, we're seeing a shift toward more experiential retail in brick-and-mortar stores. Multitenant centers can easily accommodate this trend, offering consumers a variety of options for dining, shopping and playing.
This is especially important as the economy experiences change and fluctuations: these spaces are resilient and can more easily accommodate tenants in a changing market, allowing businesses to continue to thrive even in difficult times.
Reason 2: Risk reduction
Diversifying income sources
One of the primary benefits of a multi-tenant retail center is its ability to generate stable and diversified revenue streams. With multiple tenants coexisting in the same property, investors have the opportunity to benefit from a diverse roster of tenants contributing to their revenues. Whether an investor acquires one or multiple tenants' space within a center, the success of each tenant can directly improve the operations of the surrounding tenants. This diversification reduces 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 property's overall financial performance.
Tenant Stability
Multi-tenant retail centers often attract tenants with national credibility, further adding stability to the investment. These tenants typically have established brands and strong financial positions, making them more likely to honor long-term lease agreements and pay rent. The presence of national credibility tenants also increases the likelihood of attracting customers to the center, leading to increased foot traffic and increased awareness for all tenants. Long-term leases and stable income from stable tenants contribute to an overall risk mitigation strategy for investors. Established brand names also increase foot traffic, benefiting smaller tenants in the center.
Economic resilience
Historically, multi-tenant retail centers have proven resilient through various economic cycles. Their unique structure generates more foot traffic and fosters mutually beneficial relationships among tenants, providing a stable foundation during volatile times. A diverse tenant mix and mutually beneficial relationships among tenants within a center contribute to this resilience. Additionally, multi-tenant retail centers have the potential to adapt to changing market demands, ensuring continued success and reducing the risk of obsolescence.
Reason 3: High Return on Investment (ROI)
Attractive yields
In terms of ROI, multi-tenant retail centers often outperform other types of commercial real estate investments, including single-tenant retail investments. Multi-tenant retail centers offer attractive yields for investors at various levels, and the income generated from multiple tenants contributes to a stable income stream. With a variety of businesses operating within the center, income streams are diversified and risks incurred while owning isolated single-tenant assets are mitigated.
Availability of competitive cap rates
Because the properties in these centers are developed as a whole and then subdivided as they are sold to new investors, the price and cap rate ranges are more flexible. This flexibility allows developers like us to work with potential buyers to find the right price range that matches their investment goals. By offering competitive cap rates, multi-tenant retail centers become more attractive to investors looking for lucrative returns.
According to a recent report from 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 cap rates for other types of commercial real estate, such as office buildings (5.5%), industrial properties (4.5%) and multifamily properties (4.92%). In a more direct comparison, single-tenant net lease cap rates for Q2 2023 average 5.95%, still significantly lower than rates for multi-tenant retail centers.
Growth potential
Current market trends indicate that the future is bright for retail, especially multi-tenant retail centers, which have significant growth potential. As the economy recovers and consumer spending increases, these centers are well positioned to capitalize on increased retail demand. The long-term stability of multi-tenant retail centers allows investors to enjoy sustained growth and capital appreciation over the long term. The retail market is expected to grow further in the coming years due to factors such as population growth and rising incomes.
In recent years, and particularly since the second half of 2020, the overall retail vacancy rate has declined to an all-time low of 4.8% as of Q2 2023. During this same period, average rents have continued to rise, with average asking rents reaching $23.21 per square foot in Q2 2023. Year-over-year, average asking rents are now up 2.1%. Additionally, neighborhood and community retail centers saw the largest rent increases year-over-year, increasing 2.7%. As rents continue to rise and retail space vacancy rates in these markets continue to decrease, the profitability of existing centers remains positioned to continue to grow in feasibility.
Reason 4: Strategic location and development opportunities
Site Selection
In the commercial real estate sector, location matters. When identifying locations for future centers, SimonCRE prioritizes demographic analysis and future growth prospects to select profitable locations.
Selecting a strategic location for your multi-tenant retail center is crucial to its future success. The location determines the potential customer base, accessibility, and visibility of your center. Therefore, a thorough analysis of local demographics, market trends, and competitive landscape is essential to selecting the right location.
Community impact
Multi-tenant retail centers not only contribute to local economies, but also enrich the social and cultural fabric of their communities, and the growing demand for retail in suburban areas makes these centers a smart investment.
As suburban retail demand grows, strategic locations and development opportunities become even more important. As population centers expand and suburban densities increase, multi-tenant retail centers play a key role in meeting the needs and preferences of these communities.