Multi-tenancy is the ability to have multiple virtual Moodle sites running on one copy of Moodle.
Example use case: A commercial training company create Moodle courses and wants to sell training services to multiple customers (eg companies). They do not want to run a whole Moodle for every customer because they want easy management and reporting, yet they also don't want users from one customer seeing users from another.
Each customer can manage their own users, as well as having a custom frontpage and a custom theme, enabling them to have what seems like a whole Moodle site each.
Originally this was part of the cohort plans (see http://docs.moodle.org/dev/Site-wide_groups) but was never implemented as part of that.