Why a Diverse Tenant Base is the Holy Grail of Industrial Property Investing

Just as multiple, uncorrelated revenue streams are a positive attribute for any investment, a diversified tenant base provides similar benefits for a light industrial real estate investment. Light industrial or “flex” industrial properties have smaller floorplates, generally around 50,000 square feet, and are split into smaller suites or “bays.” They are typically located in suburbs with access to major population centers and key transportation hubs.

Light industrial properties are home to many small businesses, each with different workspace needs. For example, a “B2C” business such as a chiropractic office or fitness facility needs a convenient location, ample square footage, and convenient parking. While a “B2B” business, such as a custom signage company, may have manufacturing, warehousing and shipping/logistics needs. Frank Forte, Managing Partner and CIO at Lucern Capital Partners says: “The warehouse spaces built in the 1990’s have needed to evolve given that many small businesses today have an e-commerce element. Today’s small businesses may require any combination of space configuration, warehousing, order fulfillment, access to shipping/logistics, etc. Light industrial space provides this customization to the benefit of the small business and surrounding community.” This trend of flexible facilities that accommodate small businesses’ unique space requirements is in high demand and is expected to be a long-term phenomenon.

As for the benefits to the property owner/investor, there are risk mitigation attributes of owning multi-tenant facilities. ROI isn’t tied exclusively to one company and the specific needs of that company. Further, industry risk can be managed as occupants are focused on diverse industries, and property investment returns aren’t dependent on one specific industry. Lastly, leasing to tenants with different space usage means performance won’t be tied exclusively to any single segment: manufacturing, warehousing, professional services, technology, research, etc. 

Another layer of property owner/investor protection pertains to the consistency and predictability of cash flows. The departure of any single tenant won’t significantly impact the cash flow of the asset, thus protecting the property’s income stream. The active owners’ value add is the ability to pivot quickly if a tenant’s configuration needs change, thus filling a vacancy or avoiding a vacancy altogether. This approach helps safeguard against the potential impact of economic downturns or shifts in consumer behavior as opposed to a larger industrial asset that can’t quickly respond.

The length of tenant leases in light industrial properties offers property owners/investors another layer of protection. Typical leases range from three to five years, allowing owners to adjust rates to align with the market. Additionally, light industrial leases are typically structured as triple net leases (NNN), shifting the responsibility for all costs related to the asset being leased to the tenant in addition to the base rent. This lease structure offers distinctive benefits that set it apart from other leasing options, making it appealing to light industrial property owners/investors.

The diversification of tenants in light industrial creates factors that should yield a higher property valuation over the life of the asset. With the dynamic needs of small businesses driving demand, flexibility in space configuration becomes paramount. This versatility not only caters to the requirements of various industries but also ensures a steady stream of revenue for property owners. Moreover, the risk mitigation inherent in leasing to multiple tenants across different sectors provides resilience against economic fluctuations. Coupled with the advantages of short-term, triple net leases, compared to other industrial asset types, this investment model offers stability and adaptability, transforming real estate ownership from passive to actively managed and positioning diversified light industrial portfolios to yield higher property valuations over the life of the asset.