Multi-tenant Distribution: Smaller Warehouses, But Bigger Performance

By Dennis Kaiser

Rapid growth in e-commerce has given rise to a new type of tenant that needs to support ever-tighter delivery commitments. Healthy demand and tight supply has made multitenant distribution (MTD) among the best performing commercial real estate segments, according to research by Cushman & Wakefield’s Jason Tolliver and Clay Westbrook.

They found that in 2017, MTD boasted the highest year-over-year rent growth of any property type. Further, its value on a per-square-foot basis is roughly 20% higher than the broader warehouse market with pricing continuing to increase. Cushman & Wakefield notes this segment realized a total return of 13.3% in 2017, well ahead of the overall commercial real estate return of 7%.

• Boasts the Highest Year-Over-Year Industrial Rent Growth at 6.2% In 2017
• Comprises 39% of the 14.3 Billion Square Foot U.S. Industrial Market
• Accounts for 59% of the Investment-Grade Universe of U.S. Industrial Product
• Returns Have Outperformed Other CRE Segments on A One-, Five, and 10-Year Basis

The MTD warehouse segment is generally described as warehouse/distribution buildings with small-to-medium footprints (typically 200,000 square feet or smaller), often with column spacing of 40 feet by 40 feet and clear height under 24 feet. Traditionally, tenants of these facilities tended to be local and regional distributors.

MTD comprises the largest share of U.S. industrial product, and an even greater share of industrial properties with income-generating promise that attracts the attention of institutional buyers. And tenant demand for MTD is expected to grow more than any other segment. Buildings near population centers that support efficient freight movement—reducing the time, distance and cost of both inbound and outbound transportation, while improving online and omnichannel service levels—are increasingly being sought as “final mile” nodes for retail supply chains.

Strong rent growth, still attractive income returns, and sustained investor demand will continue to drive performance in the coming years, predict Tolliver and Westbrook. Secular support for MTD from the ongoing transition to e-commerce means that even in a recession, MTD is unlikely to experience a significant or sustained correction in pricing. Cushman & Wakefield believes if an investor is seeking outsized returns or downside protection, MTD is a compelling proposition.