FEATURE ARTICLE, APRIL 2004

FLEX SPACE ATTRACTS YOUNG COMPANIES
Office/industrial flex space offers affordable alternative to Class B office product.
James Connor

Traditionally, office/industrial flex buildings offer office build out space combined with warehouse space and lots of parking. Ceiling heights are usually lower than 16 feet.

These buildings are typically cost-efficient and an attractive real estate solution for startup and young companies (niche users) occupying between 3,000 square feet and 5,000 square feet. Flex buildings are usually clustered together in master-planned business parks, and startup companies often expand to adjacent suites or nearby office/industrial facilities. This real estate product offers flexible choices to young companies, usually in suburban settings. On average, the lease terms for a young company in a flex building is 2 years to 5 years. In addition, startup companies benefit from the flex building’s proximity to the suburban labor force.

Founded in 1996, E-Micro Express, a mail order computer and computer parts company, began business in 7,600 square feet at Park 100 Business Park in the northwest suburbs of Indianapolis. Through internal growth and business success, E-Micro Express expanded into another nearby flex building to occupy an additional 21,600 square feet. Last year, the company vacated its existing space and built a custom-designed 26,000-square-foot flex facility in Park 100.

Flex product is an affordable choice for companies in a robust real estate market. As rental rates rise on Class B facilities, demand for flex product increases. This factor has lead to the recent evolution of this product type.

In today’s recovering real estate market, flex buildings have found specialized users. Many blue-chip companies — such as Blue Cross Blue Shield, United Parcel Service and Express Scripts — have turned to speculative flex buildings for service centers, call centers and administrative operations.

While some Midwest markets have seen limited build-to-suit construction of flex product, the majority of users lease existing space. Corporations with specific uses for flex buildings are taking advantage of the lower rental rates of today’s real estate market. Combine this with the increasing custom tenant finish requirements by niche users, and lease terms are much longer (10 years to 15 years) than what is traditionally seen with startup companies.

Affordability for all users of flex product continues to be the driving force behind demand. On average, flex product leases at about 25 percent to 35 percent less than Class B office product.

Beyond price, call centers and administrative offices need a much higher parking capability than offered in other affordable options. Flex buildings are often designed with glass on three sides and dock doors at the back, and a good mix of amenities often surrounds them.

During the past 12 months to 18 months, little new development of flex product has been seen in the Midwest. Lower rental rates on Class B product and an ample supply of available product has forced developers to be conservative on new construction. St. Louis, Minneapolis and Indianapolis lead the Midwest in the overall supply of office/industrial flex product.

As the economy recovers and real estate markets tighten, developers will see startup companies and corporate users increase their demand for flex product. In the meantime, the market will see more of a team approach from office and industrial brokers to successfully identify tenants for existing flex product.

Midwest cities that have experienced success with flex product in the past will see new building construction to handle the increase in demand. Until that time, developers and landlords will continue to look for ways to market flex product to niche users as an affordable real estate choice.

James Connor is regional executive vice president for Duke Realty Corporation’s Chicago area.

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