Why the Tenant Matters Surprisingly Little in Single Tenant Buildings

Underwriting tenant credit is standard practice in any acquisition, but no one, until now, has examined if that due diligence actually moves a buyer’s mind about value. A recent study found that tenant credit, despite being a key component of a buyer’s underwriting, may only slightly impact a buyer’s willingness to pay.¹ Does that surprise you? It surprised us, but maybe it shouldn’t have.

We’ll explain… but first, the research. The study focused on the most tenant-dependent type of real estate: single-tenant net-leased retail assets. Single-tenant assets come in several flavors, including industrial buildings fully leased to a manufacturer or Amazon, or office assets fully leased to a large corporate user. But those assets are often more operationally essential—and therefore more stable—than single-tenant retail properties, which are typically stand-alone drug stores, restaurants or big-box stores. Retailers, unlike industrial or office tenants, can fall out of favor quickly or lose business when competition moves in nearby. In other words, there’s more risk.

Because of that risk, you would think it’s critical to carefully assess tenant quality and the likelihood that rent gets paid over the full lease term. And that intuition is borne out—just not as strongly as you might expect. The study finds that “properties with tenants that are corporate owned, tenants with direct or subsidiary publicly traded ownership, and tenants with lower default probabilities trade at… lower cap rates.”