Press Article

Opportunities for Multi-Tenant Properties

Digitalization and flexibilisation are more than mere trends. They are code words for the fact that our way of living and working will be changing fundamentally in the decades to come. This will also impact how single- and multi-tenant properties will be assessed in the future.

BY NIKOLAI DЁUS-VON HOMEYER

In the digital information society, private life and the working world are increasingly melding together. Where we perform our work is no longer important. High-performance mobile end devices, communications networks and work in the Cloud are making this mobility possible. The demands being placed on employees are also changing in the era of Fourth Labour Revolution. Companies have to adapt much faster to developments and/or are helping to define them. In highly volatile markets, businesses are relying more on creativity and innovation than on the efficient resolution of defined tasks.

Commercial tenants will have to take a second look at their own spatial concepts. The traditional office structure based on attendance at the workplace is increasingly being supplanted. The factors determining the demand for space among commercial tenants will be changing sharply in the coming decades, at a rate never seen before. This enormous dynamic will not be without consequences for future investment strategies.

Though this challenge is familiar to experts, current office structures still exhibit signs of the old working world. The design and structure of future offices will increasingly be aimed at networked communications and interaction between employees in a pleasant atmosphere. One thing space requirements and the associated demand for space in specific industries will certainly no longer be in the future: relatively rigid and easy to predict. Commercial tenants will search for solutions to help their employees usher in this permanent transformation in an innovative and creative way so as to capture new fields of business and markets for their companies.

Pressure on tenants to change is increasing

What does this mean for future investment strategies? Demand for space will constantly rediversify at a greater pace than anything we have seen to date. Driven by digitalisation and flexibilisation, markets will change more rapidly. Tenants will often no longer want to have the same spaces over extended periods of time. Nor will they always maintain the same credit ratings. Asset managers will therefore have to be able to act more flexibly to adapt needs to changing concepts and tenant structures. This revolution in daily life and the working world speaks in favor of multi-tenant properties in the future, because multi-tenant properties offer better risk diversification in volatile markets. The flexibility associated with these properties will become more and more important for asset managers and investors. The appreciation potential of these properties will also be much higher in the future, because they are constantly being further developed. While multi-tenant asset management is more challenging and seemingly costlier due to the sharper fluctuation of tenants and more frequent need to redesign space, the trend towards digitalisation also offers enormous efficiency potential for the asset managers leveraging it.

Increases correlation risk

The risk associated with single-tenant properties of being confronted with an insolvent tenant before the expiry of a lease because the industry has changed faster than expected will only continue to increase. Digitalisation will accordingly increase the correlation risk of single-tenant properties that do not present alternative opportunities for higher returns. At any rate, this higher degree of entrepreneurial risk is currently not being priced into the initial yields of single-tenant properties.

This does not mean that single-tenant properties are not recommendable any more. It does mean that much more than in the past, investors will have to factor in the risk that they might end up with a property that no longer meets market expectations after the expiry of a long-term lease. To put it positively: Single-tenant properties purchased at ten-times the net rent based on a 10-year lease certainly can be very lucrative, when only equity is employed. A tenant with a sound credit rating can then signify secure and stable rent over a relatively long period of time. Investors know with relative certainty in such cases that they will earn their investments back.

Meanwhile, the numerous users in multi-tenant properties automatically diversify the correlation risk associated with digitalisation. Multi-tenant properties are renovated continuously and not just at the end of leases. In short, it will be increasingly important in the future, particularly in the top 7 cities, to consider the tenants and industries that are affected most by the described change or that even drive this change themselves with their new business models.

NIKOLAI DЁUS-VON HOMEYER IS FOUNDER AND MANAGING DIRECTOR OF NAS INVEST.