The COVID-19 pandemic, rapid inflation, supply chain disruptions, unprecedented interest rate hikes and geo-political conflicts have transformed the commercial real estate sector. Over the last few years the way people live, work and play has completely changed. Events like these serve as an unfortunate wake-up call for many stakeholders. In such a volatile environment, particularly in the single-tenant net lease space, the importance of rigorous tenant underwriting comes into play now more than any time in recent history.
CAI Investments is an experienced asset manager, developer and private placement sponsor that is setting new industry expectations on tenant underwriting.
The Importance of Tenant Vetting in Single-Tenant Investments
It goes without saying that tenant strength is critical in single-tenant investments to ensure consistent rent payments and lease compliance. What often gets overlooked is that even if the tenant remains in compliance with the lease and pays their rent on time, a weakened tenant can have secondary effects.
- • Exit Proceeds: If a tenant’s financial or operational outlook has deteriorated from the time of acquisition it will inevitably impair sales proceeds at the end of the investment period. A strong, creditworthy tenant enhances exit valuations, reflecting reduced risk and higher value.
- • Ability to raise capital: One of the greatest risks for sponsors is failing to raise the necessary capital, and tenant strength plays a pivotal role here. A strong tenant boosts investor and lender confidence, making capital raises easier and more cost efficient.
- • Lease renewals: Vacancy cost, tenant improvement allowances, and broker fees are a direct result of a tenant not renewing its lease. Historically, tenants with strong financials are more likely to renew leases and handle rent escalations, reducing the aforementioned impacts.
- • Liquidity: In volatile or uncertain markets, properties with strong tenants benefit from a "flight to quality" mindset, where investors shift their focus towards safer, more predictable assets. As a result, properties with strong tenants experience increased demand, enhancing liquidity even in challenging markets.
Therefore, beyond basic rent assurance, tenant choice directly impacts the investment's overall security and profitability.
CAI’s Rigorous Underwriting and Acquisition Strategy
Our CAI team, like many others, underwrites the financial risks of tenants including but not limited to their earnings, financial flexibility, balance sheet, and cash flow. We seek to understand the tenants:
- • sources, composition, and quality of revenue
- • potential opportunities for growth
- • the underlying cost structure
- • the effectiveness of product pricing strategies
- • the stability or volatility of income streams
Beyond understanding the current and future financial strength of the tenant, CAI is cognizant of the fundamentals of industry the tenant operates in. Understanding the tenants industry is such a crucial step in tenant underwriting because industry dynamics can, and likely will, significantly impact a tenant's long-term viability, if not properly understood.
One example is tenants that operate in the technology sector, these companies are in competing against constant innovation and disruption, where new advancements can quickly render existing business models obsolete, especially in the wake of Artificial Intelligence.
To thoroughly gauge the risk associated with the industries that our tenant operates in, here are some of the factors CAI takes into consideration:
- • Risk of Industry Obsolescence
- • Current and Future Industry Regulation
- • Exposure to Interest Rate Changes
- • Dependency on Consumer Confidence
- • Impact of Global Trade Fluctuations
In summary CAI underwrites the entire picture of a tenants business, their financials, industry, and business plan to ensure they fit within our investment philosophy.
Case Study: The Wisconsin-Illinois Border Manufacturing Facility
CAI acquired the vacant 1.5 million-square-foot former Motorola factory in Harvard, Illinois, from the U.S. Marshals. Our goal was to reposition the dormant asset by attracting a high-quality tenant that aligned with our thorough underwriting standards, focusing on recession resistance, industry security, and long-term viability. We were able to secure a 20+ year lease with US Medical Glove Company (USMGC) usmg.us. In evaluating USMGC as a tenant we took a holistic approach to underwriting focusing on both the tenant's financial health and the broader industry landscape.
Underwriting Considerations:
- • Tenant Financial Strength and Industry Resilience: In reviewing USMGC as a tenant, we assessed their financial stability, growth potential, and adaptability in the competitive PPE manufacturing sector. A key consideration was the substantial support and grants USMGC received from Health and Human Services (HHS) and the Department of Defense (DoD), which highlights their strategic importance to national health security. These federal investments not only bolstered USMGC’s financial position, but also confirmed their role in a critical, recession-resistant industry that saw heightened global demand for medical gloves during the COVID-19 pandemic. This backing provided a strong foundation for their growth, making them a reliable long-term tenant with government-validated stability.
- • Industry Dynamics and Future-Proofing: Beyond current financial metrics, we examined the broader industry in which USMGC operates. We recognized the importance of onshoring critical PPE manufacturing to reduce reliance on foreign supply chains—a key national regulatory priority. The tenant's commitment to utilizing American labor, materials, and advanced in-house technologies positioned them as a forward-thinking, technology-proof business likely to withstand future market shifts and regulatory changes.
- • Operational Stability and Technological Integration: USMGC's approach to re-engineering the glove manufacturing process, including developing proprietary manufacturing machinery and onshoring chemical production, highlighted their technological resilience.
- • Regulatory Environment: As part of our underwriting process, we evaluated the favorable regulatory landscape that supports USMGC. Regulatory trends, including the Buy American Act and the Berry Amendment, highlight the U.S. government's commitment to prioritizing domestic manufacturing, especially for essential goods like PPE. These policies mandate federal agencies to source products made in the U.S., creating a significant competitive advantage for companies like USMGC.
Why CAI’s Single-Tenant Model is Superior
CAI’s focus on single-tenant net leased properties, combined with tenant vetting process, is sought to significantly mitigate risk and enhance stability. By evaluating each tenant’s financial strength, industry resilience, and long-term viability, CAI ensures that only recession resistant and technology proof tenants occupy our properties. This approach mitigates vacancy risks, minimizes lease defaults, and ensures predictable cash flows.
By aligning with tenants that demonstrate strong growth potential and adaptability, the high-quality tenants CAI does business with enhances property desirability, supports higher valuations, and improves exit strategies. CAI’s model is designed to capture ongoing value through secure, reliable partnerships, driving superior investment performance over the long term.
Conclusion
CAI’s tenant vetting process and strategic acquisition approach set a new industry expectation for single-tenant investments. By going beyond traditional financial analysis and evaluating tenants’ resilience, industry positioning, and adaptability to future challenges, CAI has redefined what it means to invest in single-tenant properties.
This commitment to high-quality tenant selection and comprehensive due diligence allows CAI to be a preferred partner for financial advisors and their clients, ensuring that each asset in the portfolio is positioned for long-term success and stability.
Investment advisors are encouraged to explore Manufacturing Essential Asset I, DST and the advantages of our single-tenant investment opportunities. Discover how CAI’s superior tenant-focused model can enhance your clients’ portfolios with stability and sustained value creation.