One of the commercial real estate asset classes that has drawn increased focus in recent years is flex space. The “flex” in flex space refers to the word ‘flexible’ because these properties are easily adaptable through tenant improvements for a variety of tenant types.
While these are typically single story structures that have an office and warehouse component, retail may also be included. They give both the tenant and the owner flexibility for a variety of reasons that we will discuss in this article.
This asset class is slated to see tremendous growth in the next few years. This growing demand is because of the implied flexibility to the tenant, on top of low current supply as this is a newer type of office space in the commercial real estate sector.
“Flex Spaces” started evolving over the past thirty years from traditional industrial buildings with a utilitarian design for shipping and receiving manufactured or distributed products.
As the years went on and this practice became more commonplace, office workers began to be centralized in the same locations. Manufacturing components such as loading docks and warehouses were strategically located away from the main office worker access, with more parking and accessibility for the office or retail workers.
These factors have driven a surge in demand from a variety of tenant types, from the life sciences sector that requires both a laboratory and office component, to a manufacturer that produces baked goods in the manufacturing component, then sells and interfaces with customers directly through a retail, and perhaps even management and other employees working within an office component.
Companies also may need to adapt as they grow over the years. Many companies will specifically target flex spaces because of the lower cost of converting the space in different ways over the course of their lease. With long lease terms, they have plans in place to repurpose components of the property as their business evolves. An example of this may be a medical consulting company that needs to create specialized laboratory spaces as they conduct research on different topics over time.
Investors and building owners also desired increased flexibility when leases with their current tenants expired. If their building wasn’t sufficiently adaptable, it risked heightened vacancy periods in such situations and businesses have the ability to make the space their own by adding new features at the time of their occupancy.
Some of the key points driving the desirability of flex space are:
1. Adaptability:
These are spaces designed to have tenants come in with their own specifications and needs. The owner will coordinate with the business for tenant improvements and build out the spaces as needed. If a building is designed with the purpose of continually being re-adapted, it’s much more cost effective to do so than trying to repurpose older, more specific buildings that missed the mark on adaptability.
2. Marketable to Many Tenant Types:
As an investor in flex real estate, you can sleep easy when leases expire. Your building is more versatile than the stale and harder to market competition. Your space could be repurposed to many different types of tenants and thus your vacancy periods will be lower. Vacancy rates in some of our favorite markets for flex space have been trending well below 4% in recent years.
3. Efficiency Factor in Lease Rates:
Flex space buildings are designed in a highly efficient manner. Coming from a development background, something we’re very in tune with is the efficiency factor of our buildings. This refers to how much of the building is dedicated to real usable space and how much is dedicated to your common areas. The more stories a building has, the more common area it is likely to have, which flex spaces often eliminate by being single story. There is thus a lower rental cost to the tenant, who would normally cover rent on common areas, as well as a more efficient and affordable design for the developer.
4. Different Employee Types Needing Direct Interaction:
It’s usually much simpler for an office and warehouse to be housed in a single space. This is for logistical purposes as well as the ability to properly administer and manage the often complex moving parts involved in manufacturing and logistics.
Commercial real estate development trends move slowly, so the supply has yet to catch up with the demand. That’s why, as of the writing of this article, less than 5% of the office stock in the United States is flex space. This presents a great opportunity for the savvy real estate investor to get into this space and repurpose or develop new flex space in the coming decade.
Our company is based out of Boston and many of our investments are in this area. Explosive population growth that far outpaced the projections coupled with the lowest inventory of major cities for flex space has drawn the attention of many major developers into the area, with new projects in the greater Boston area being announced every week.
Here is our list, based on existing flex inventory and the demand for this type of space, of some of the hottest markets we are currently looking to invest and develop in:
- Boston, Massachusetts
- Austin, Texas
- Atlanta, Georgia
- Nashville, Tennessee
- Washington DC
- San Francisco, California
- Seattle, Washington
- Denver, Colorado
I would recommend you begin researching flex space and see if it might be something you might want to become involved in. Our company is currently scouting a number of lots in submarkets that have a high demand for flex space. There will be a large amount of opportunity in the coming years to get into this field. Network with commercial brokers that are involved in leasing flex space in your area and try to get an understanding of what companies may be looking to lease in your area, as well as get a general understanding of what locations they are targeting.
If you have development experience, building flex space is relatively simple compared to many other types of real estate, it’s just a matter of having the right relationships in place in the markets you’re targeting. Experienced brokers interact with many different tenants every day and understand what they will be looking for.
One of the commercial real estate asset classes that has drawn increased focus in recent years is flex space. The “flex” in flex space refers to the word flexible because these properties are easily adaptable through tenant improvements for a variety of tenant types. These are typically single story structures that have an office and warehouse component. Retail may also be included. They give both the tenant and the owner flexibility for a variety of reasons that we will discuss in this article. This asset class is slated to see tremendous growth in the coming years due to high demand, due to the implied flexibility to the tenant, and low current supply, due to this being a newer type of office space in the commercial real estate sector.
These buildings arose over the course of the past thirty years from traditional industrial buildings with a utilitarian design for shipping and receiving manufactured or distributed products.
As demand began to increase for buildings that had these same capabilities, but were designed with more functionality for an office component as well. Manufacturing components such as loading docks and warehouses were strategically located away from the main office worker access, with larger parking and more accessibility for the office or retail component workers.
These factors have driven a surge in demand from a variety of tenant types, from the life sciences sector that requires both a laboratory and office component, to a manufacturer that produces baked goods in the manufacturing component, then sells and interfaces with customers directly through a retail, and perhaps even management and other employees working within an office component.
Companies also may need to adapt as they grow over the years. Many companies will specifically target flex spaces because of the lower cost of converting the space in different ways over the course of their lease.
With long lease terms, they have plans in place to repurpose components of the property as their business evolves. An example of this may be a medical consulting company that needs to create specialized laboratory spaces as they conduct research on different topics over time.
Investors and building owners also desired increased flexibility when leases with their current tenants expired. If their building wasn’t sufficiently adaptable, it risked heightened vacancy periods in such situations and businesses have the ability to make the space their own by adding new features at the time of their occupancy.
Some of the key points driving the desirability of flex space are:
1. Adaptability:
These are spaces designed to have tenants come in with their own specifications and needs. The owner will coordinate with the business for tenant improvements and build out the spaces as needed. If a building is designed with the purpose of continually being re-adapted, it’s much more cost effective to do so than if you’re trying to repurpose older, more specific buildings that didn’t keep adaptability in mind.
2. Marketable to Many Tenant Types:
As an investor in flex real estate, you can sleep easy when leases expire. Your building is more versatile than the stale and harder to market competition. Your space could be repurposed to many different types of tenants and thus your vacancy periods will be lower. Vacancy rates in some of our favorite markets for flex space have been trending well below 4% in recent years.
3. Efficiency Factor in Lease Rates:
Flex space buildings are designed in a highly efficient manner. Coming from a development background, something we’re very in tune with is the efficiency factor of our buildings. This refers to how much of the building is dedicated to real usable space and how much is dedicated to your common areas. The more stories a building has, the more common area it is likely to have, which flex spaces often eliminate by being single story. There is thus a lower rental cost to the tenant, who would normally cover rent on common areas, as well as a more efficient and affordable design for the developer.
4. Different Employee Types Needing Direct Interaction:
It’s usually much simpler for an office and warehouse to be housed in a single space. This is for logistical purposes as well as the ability to properly administer and manage the often complex moving parts involved in manufacturing and shipping.
Commercial real estate development trends move slowly, so the supply has yet to catch up with the demand. That’s why, as of the writing of this article, less than 5% of the office stock in the United States is flex space. This presents a great opportunity for the savvy real estate investor to get into this space and repurpose or develop new flex space in the coming decade.
Our company is based out of Boston and many of our investments are in this area. Explosive population growth that far outpaced the projections coupled with the lowest inventory of major cities for flex space has put the eyes of many major developers into the area, with new projects in the greater Boston area seemingly announced every week. Here is our list, based on existing flex inventory and the demand for this type of space, of some of the hottest markets we are currently looking to invest and develop in:
- Boston, Massachusetts
- Austin, Texas
- Atlanta, Georgia
- Nashville, Tennessee
- Washington DC
- San Francisco, California
- Seattle, Washington
- Denver, Colorado
I would recommend you begin researching flex space and see if it might be something you might want to become involved in. Our company is currently scouting a number of lots in submarkets that have a high demand for flex space. There will be a large amount of opportunity in the coming years to get into this field. Network with commercial brokers that are involved in leasing flex space in your area and try to get an understanding of what companies may be looking to lease in your area, as well as get a general understanding of what locations they are targeting. If you have development experience, building flex space is relatively simple compared to many other types of real estate, it’s just a matter of having the right relationships in place in the markets you’re targeting. Experienced brokers interact with many different tenants every day and understand what they will be looking for.
