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Flex Space

Flex space is one of the hottest commercial real estate properties to own

By Terry Painter/ Mortgage Banker

Member of Forbes Real Estate Council   Author of "Encyclopedia of Commercial Real Estate Advice" – Released May 2020

 

What is flex space? Flex space is industrial space that starts with non-air conditioned warehouse space in the back and an office or showroom in the front. You have the flexibility to “flex” with putting small or larger spaces into the building as is wanted. Flex spaces are also buildings that are zoned commercial on the fringes or outskirts of town.

 

Flex space is one of the hottest commercial real estate properties to own in that the properties almost always stay full. Because the tenants have their businesses there with showrooms, they are kept neat and tidy. Spaces range from 2,500 to 10,000 square feet. What are businesses that most commonly occupy flex spaces? Mechanic shops, churches, dotcoms, and businesses that contract pest, electrical, plumbing services, furniture stores, and even funeral homes. 

 

What is the history of flex space? In the beginning, flex spaces were light industrial warehouse spaces that were converted into office space with storage for inventory for the business. Another historical factor is that the need for flex space came about because businesses found that if they had an attractive showroom at the same location where they stored their inventory, customers would come to them even though they were not centrally located. 

 

With flex space, companies experience greater cube space occupancy on the office portion of the space. Companies have wasted space because of some employees traveling a number of days out of town for business trips, some going on vacation, some being ill, some taking leave, and some employees working at home. Not only can there be a big reduction in wasted space, but also a higher income from the leasing of the extra space.

 

For the tenant there is an advantage of being able to flex into a bigger space or larger space as required. This can save the tenant quite a bit of money to not have to move to a different location. If there is more space available next door, they can simply flex into it. Money can be saved from not having to have a moving truck to move equipment, furniture, or other inventory to a centrally located showroom. By eliminating a showroom in town, they are saving on rent and employment costs. There are also the many hours it takes to move, and make the required changes to set up a new location. Often a vacant flex space can be made ready, supplied with inventory and the new business move into it in as little as a week.

 

When an employee shows up at the start of a day at their flex space building, that employee picks a cube to work at. That will be that employee’s cube for the day. When the employee is done working for the day, they pack up their belongings and either store them in a private place in the building, or bring them home.

 

It is important that the cube is left like it was when the employee entered the space. An important detail is that the company needs to arrange to have a good cleaning service to keep the cube spaces clean.

 

Flex buildings usually have more than one unit, and they are usually a single story, but some have a mezzanine level.

 

Benefits of flex buildings:

1. Lower construction cost which can be passed on to tenants

One factor which explains why flex space buildings can cost less for their leases is that flex space buildings cost a lower amount to build. It is simpler construction. The owners can factor in construction savings to be passed on to the tenant as lower rent.

 

2. Lower lease rates because you don’t pay for common areas  

This includes the building lobby, waiting room, and hallways. When you walk into the flex building you work at, you open the door to your particular unit, and you walk right into that space.

 

Leaseholders charge for the amount of square footage that factors in common areas. Therefore with less usable square footage in a flex space, you are charged less. On the average flex spaces will save you 14% because the conventional type building adds 15% for common areas, whereas the flex space only charges 1 percent for common areas. The common area for a flex space is the landlord mechanical rooms.

 

So, for example, a tenant in a conventional building has a 10,000 square foot office space being leased. The amount of square feet the space will be grossed up to is 11,500 square feet. This additional 1500 square feet is due to the 15% mark up from common areas. Now compare this to the mark up in a same size flex space: 10,100 square feet. This is only a 1 percent markup rather than a 15% markup – a nice savings.

 

3. No cost for an elevator or time for waiting
Due to flex buildings being single story, there is no elevator in a flex property and no wait time for the elevator. Elevators are expensive to purchase as well as maintain. Tenants in flex spaces don’t have elevator costs as an additional rent charge.

 

4. Real estate taxes that are lower
Realty taxes are based on a percent of the property’s value. Because flex space properties generally have a lower value than traditional properties, lower taxes have to be paid.

 

5. Signage for each tenant in a flex space
Each tenant in a flex space can have signage. Typically, traditionally structured office towers only offer signage for very large tenants.

 

6. Higher ceilings

Eight to nine feet ceilings is what traditional office buildings offer tenants, along with T-bar ceiling tiles. On the other hand, with flex properties you are offered exceedingly high ceilings of 12 – 16 feet – the advantages being sound muffling from noises having to go far to hit the ceiling and echo back, as well as the spacious feeling high ceilings give.

 

7. Tenants can negotiate for the right to expand their space
Called expansion rights, this is a tremendous advantage. Without having this capacity, a tenant has to endure the loss of expense and time involved in moving. In towers it tends to be much easier to expand your space because of the greater number of lease rollovers as well as greater number of tenants.

 

Disadvantages of flex buildings:

1. Flex buildings do not come with nice views. In a flex unit, if you look out your window you can see your parking lot.

 

2. More vulnerable to burglary

Since flex spaces are on the ground floor, there are burglars who smash windows to snatch laptops that they can see. Lots of traditional office buildings have a security guard on a 24 hour a day basis. Flex spaces don’t have a security guard.

 

3. No Amenities:

Amenities do not come with flex spaces. You get bare bones to keep your costs down – no swimming pool, no concierge, no workout area, no barbeque area.

 

Summary:

You are a good candidate for a flex space if you:
                 1. Want to store your inventory and have a show room at the same location

2. Have a business with stability that can locate on the edge of town
3. Need at least 2,500 to 10,000 square feet of space
4. Have a business that needs a space to store inventory but also has the need  for a showroom and looking to save money by having one location instead of two.

5. Are looking to lower your rent.

 

By Terry Painter/President   Apartment Loan Store and Business  Loan Store