What is Flex Real Estate?
You have probably heard the term “flex” before in relation to commercial real estate, but what does it actually mean? And why is it in high demand? A flex property, short for flexible property, is simply a hybrid of office and industrial space. For anyone interested in commercial real estate investing, this is an important term to know.
These buildings can stand-alone or be located in dense, single story industrial parks. The typical layout for a tenant includes an office space up front, with storage/warehouse space in the back. The versatility of these spaces attracts a wide variety of businesses; a few examples being construction, manufacturing, e-commerce, medical and logistical distribution. The ability to have a space for office, warehouse and manufacturing all under one roof is just one of the reasons the flex product type has been so successful. Even through one of the toughest years, where almost every facet of life has been affected by the COVID-19 pandemic, flex spaces have continued to rise in popularity. Let’s explore why.
Benefits of Flex Space
- COVID-19 Resistant
Among the many benefits of flex spaces, resilience during the pandemic is at the top of the list. There are several significant benefits to the flex asset during times like today. Unlike large, multi-tenant office buildings that share common spaces like lobbies, bathrooms, and hallways, flex assets are all privately accessed by each tenant. In addition, they also have their own single door access to the suites, with the ability to control who comes in and out of their space. Tenants also have their own private offices, private bathrooms, and private walkways, allowing for many small businesses to remain open during the pandemic.
- Customizable at a Low Cost
One of the most appealing aspects of flex space lies within its customizability. For example, if tenants want to increase their office space or warehouse space, they are easily able to do that with flex space due to the reduced improvement costs in comparison to office products. Traditionally, we see Class A-B office buildings with improvement costs ranging from $20-$40 per square foot while flex spaces range from a much smaller number of $5-$20 per square foot. Flex product also allows for the tenant to have more space at a more affordable cost. The average leasing rate for office space in Nashville, Tennessee is roughly $29.50, whereas the average leasing rate for a flex space is $11.71. At the end of the day, flex assets provide very affordable and customizable leasing options for cost-conscious office users.
Another benefit that falls under this category is the vast diversification of its tenant mix. Unlike multi-tenant office buildings that are catered only to white collar workers, such as law firms, insurance companies, financial institutions, etc., flex assets have tenants that range from construction companies all the way to retail-style restaurants. The customizable build-outs allow for a strong mix throughout each flex industrial park that normal multi-tenant office buildings would not be able to accommodate. As a result, landlords are mitigating risk by having a wide range of diversified national and local tenants throughout their business parks.
- Triple Net (NNN) Leases
Lastly, and arguably the strongest benefit of flex assets, is the way most landlords structure their leases. Typically, with flex spaces most tenants will have a Triple Net Lease structure in place. In a Triple Net lease, the landlord passes three key expenses onto the tenant: taxes, insurance, and common area maintenance. Common area maintenance can be best described as utilities and general expenses related to upkeeping the assets common areas, such as general landscaping and parking lot expenses. Unlike multi-tenant office buildings, where the landlord typically pays for the expenses mentioned above, flex assets give the owner the unique opportunity to avoid these incurring costs. Therefore, under a Triple Net Lease structure, the Landlord is only responsible for paying large capital expenditures.
While our current multi-tenant office portfolio remains strong, with an average vacancy rate of 90% and an average 10% cash on cash return, we find ourselves pursuing these flex deals throughout the Southeast and Midwest as opportunities continue to present themselves. We at Excelsior believe that the Flex Asset class is one of the best investment options currently due to its resistance to the pandemic, customizability with low costs, and strategic lease structures.
If you are interested in learning more or have any questions, please do not hesitate to contact us.
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