Why are Flex Warehouses not considered institutional assets?
This property type seems to be the work horse for so many businesses that don’t need a large distribution warehouse.  Why don’t we typically see these types of buildings trade hands on the capital markets (outside of Tier 1 cities)?  What is keeping them from being an institutional asset like self-storage or suburban multi-family has become?  Most owners that I’ve met are local developers or some PE group that has 2-3 in a market, so it seems like there is a diverse and willing seller pool out there.   Is it that the buildings are so varied in their construction and build out?  come to think of it, I haven’t really seen many new flex warehouses built in the past 20 years.  Thoughts?
[{"id": "io97inm", "text": "Theres a lot of owner-occupancy going on in flex space because the spaces themselves are too small for the property owner to make much profit on them. The fixed costs are high and the rent is cheap. At least in smaller retail and residential you are leasing at premium rates.\n\nAlso, there is no real \"value-add\" play with flex space.", "replies": [], "depth": 1}, {"id": "io9ckky", "text": "My $.02\n\nToo small in absolute terms (could you imagine 150,000 sq ft of flex space divided up into 50 to 100 units!?). Too much touch with numerous small tenants &amp; high turnover to be attractive to big money. Flex space occupies a niche between garage/self storage/don't need commercial zoning &amp; small (5 to 20 thousand sq ft) owner occupied space.\n\nAlso throw in the different needs of tenants within flex space (moving the % slider between office &amp; warehouse/production uses, customer traffic versus shipping needs) and even \"flex space\" starts to have different meanings.\n\nThere probably is a \"better way\" to address the market but I'm not sure it is profitable enough for someone to reinvent the wheel in the space... yet. \n\nMaybe this space is the next mobile home park\ud83e\udd37\u200d\u2642\ufe0f", "replies": [{"id": "io9evqn", "text": "So, ironically, flex space is not really that flexible in terms of being easily manipulated to accommodate the varying needs of different tenants throughout the life cycle.  There has got to be a better way to make this product work.  I\u2019m going to start giving this some blue sky thinking.  I sure there is a profitable and non- management intensive way to do this.", "replies": [], "depth": 2}], "depth": 1}, {"id": "io9h9be", "text": "Flex tenants require high TI's and are typically low credit/local businesses.  Also, typically smaller assets.", "replies": [{"id": "iob04sg", "text": "all this but to tack on there are significant environmental and management issues.\n\nI might buy a badly managed apartment complex and remodel/get a new management agent or whatever to bring it back to market.  There are 1000 issues that come up in flex space that won't show up there and can cost big bucks.\n\nThe worst res tenant in the universe isn't going to be on a 10 year lease and be using chemicals on a daily basis I've never heard of", "replies": [{"id": "iocgkhc", "text": "And how many of the tenants are really office users who don\u2019t use the production/wh and are just there for cheaper rent?  I\u2019ve seen in other cycles where the local office market goes into the tank some of these tenants leave the flex space for cheaper office space as an upgrade.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "io9npk0", "text": "In my market institutional players have been gobbling up these types of assets for the last couple years. Rent growth has been phenomenal the last few years and building new smallbay space is cost prohibitive. If you know of any flex park owners that would sell please send me a pm, I can probably help you find a buyer.\n\nArticle below is from 2016 but is a good read in support of these assets as an institutional investment.\n\nhttps://static1.squarespace.com/static/57a1250a9de4bb8f9adff023/t/5b84504a4d7a9c53057be1e6/1535397970022/The+Case+for+Small+Bay+Warehouse.pdf", "replies": [{"id": "io9rpzr", "text": "This article is addressing \"small bay warehouses\" between 70,000 and 120,000 square feet... not the 10,000 to 50,000 sq ft building divided into individual units between 1,000 and 3,000 of a combination office/warehouse that I (and I believe OP) are talking about as flex space.", "replies": [], "depth": 2}, {"id": "ioekpid", "text": "Is this report making a specific distinction between light industrial and flex warehouse?  I feel like they are describing light industrial buildings, which I would imagine would be warehouses with a depth of 200' or less, and probably more like 150' deep.  Without question I think that product type should be on everyone's radar.  We have seen valuations skyrocket in our portfolio by way to unsolicited offers we continue to receive monthly.\n\nWhat I'm truly interested in is bona-fide flex space, meaning 25-30%+ office build-out with average tenant size ranges of 3,500 SF to 15,000 SF.  Our portfolio of these properties is about 1.5m SF and we are at 99.6% occupancy with about 150 tenants and in place rents that are about 40-60% higher than they were 4 years ago.  The biggest issue is accommodating these tenants' growth needs, while not locking them into 5-year leases.  The cost of tenant improvements has been nauseating, and I've agreed to several deals that I ended up regretting because our TI estimates came in 50-100% higher than I anticipated for relatively moderate amounts of work.  But the demand seems constant and tenants continue to pay whatever rent we quote them.", "replies": [{"id": "iofwqym", "text": "How much turnover do you see in your larger (10-15k sq ft) tenants? That amount of space is pretty attractive for small and regional lenders to make OORE loans to even moderately successful companies.", "replies": [{"id": "iofzouj", "text": "Our annual tenant retention rate is probably 95% over the past 30 years with these assets.  More than a few tenants still have original leases with references to Y2K compliance.  I think many tenants in the 10 to 15,000 square-foot range are intimidated by the prospect of purchasing a building, especially if the owners\u2019 personal capital is tied up in the business and they are worried about over-committing to space or quickly outgrowing whatever they buy.  \n\nI encourage many of our tenants to become their own landlord and look for properties to buy. Usually that process is what builds value in leasing from us. We maintain our parks well and provide prompt property management and leasing services. Typically the types of buildings that they will be looking at will need a lot of TLC and they start to realize that will take away from their focus on the business.  With regards to national tenants in that size range who lease from us, they always like to tiptoe in our market and don\u2019t like to plant an expensive flag that they cannot easily take down.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iobsado", "text": "We are actively buying small bay warehouses in Florida.  We are converting to NNN leases and planning on rolling them all up and selling to an institution.  Institutions need scale.  I\u2019m being told once we hit 50 million in product that is run the right way, an institution will gobble it up. \n\nAlso PM if you have a small bay deal.", "replies": [{"id": "ioekudu", "text": "What's your definition of small bay?  Is that by average tenant size, building depth, or some other metric?", "replies": [{"id": "iogzoy8", "text": "Units 10,000sf or less.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]