FEATURE ARTICLE, APRIL 2005

THE JOY OF FLEX
The versatility of flex space has helped it shed its budget-conscious-only image as market improvement is anticipated.
John Coleman

Kia Motors recently moved into a flex building in Oak Creek Center in Lombard, Illinois.

So what is the official definition of flex? According to Costar, it is a building designed to be versatile and may be used in combination with office, research and development, quasi-retail sales, industrial processing or high tech. A flex building is typically one or two stories with at least half of the rentable area being used as office space; it has ceiling heights of 16 feet or less; and it has some type of drive-in door or dock.

Looking at the national picture, flex vacancy was at 15.9 percent at year-end 2004. Asking rents in 2004 dropped to $9.71 per square foot, which was down from $10 in 2003. Since 2001, national rental rates for flex have consistently gone down as vacancies have trended up.  (The only exception is between the third and fourth quarter of last year when vacancies improved from 16.2 percent to 15.9 percent). In the Midwest, vacancies stand at 13.9 percent with rents at an average of $9.60.  Compared to pure office and industrial product, these numbers are in the same ballpark; however, a big part of the flex market softened because technology users account for a high percentage of flex space and were among the hardest hit by the recession. Time will tell how soon the sector recovers.  Also, some flex tenants took advantage of the market to trade up to Class A office space, which was at a steep discount. As recovery continues, stabilization and rent growth will once again appear in the flex market, with a slow climb beginning in the fourth quarter of this year. Vacancies will similarly improve. 

With the exodus of money from Wall Street into real estate, all product types are relatively hot compared to years past. In the office, industrial and flex arena, all of the fundamentals converge regarding cap rates. Single-tenant, high-credit deals with long-term leases remain the holy grail of investors and draw big spenders from the institutional and REIT worlds. Interestingly, among smaller industrial buildings, which mostly fall in the flex category, cap rates range from 8.13 percent to 8.57 percent.

The joy of flex is its versatility. If a company has an office use, it can build out the space with a 9-foot dropped ceiling.  If it wants a retail component, the company can create a showroom with a mezzanine. On the other hand, if it needs a production or processing space, it can use the 16-foot to 18-foot ceilings to rack inventory. Other advantages flex has over more traditional office buildings include:

1. The tenant controls HVAC and hours of operation;

2. The tenant has direct access to space without going through a common area;

3. The tenant controls security of space, which is an advantage for both personal security and corporate security since limited access points make it easier to record all ingress and egress to the building and parking is much closer;

4. The tenant can mix office and process functions at one location, eliminating redundancy in support services; and

5. Flex space is much less expensive than traditional office.

For example, in Lombard, Illinois, Trader Publishing recently moved into a flex building. The company had at one point separated its executive and sales offices from its warehouse operations, but believed that certain business synergies were lost and that it was imperative for all operations to be consolidated. Trader Publishing now occupies 18,000 square feet with 75 percent office, a 16-foot clear warehouse and plenty of parking for a call center.

Kia Motors’ recent move provides another example. The company moved into a single-story office building at The Alter Group’s and KBS Realty’s Oak Creek Center business park in Lombard because of the abundance of parking and the ability to develop a simulated service environment to train car mechanics and sales staff. Kia now is exploring the option of connecting some of its production space to straight office.  A flex environment gives them the flexibility to reorient the space to accord with this direction.

Because of their lease rates ($3 to $4 cheaper than single-story office space), flex buildings used to be only considered budget space for budget-conscious companies, which are companies utilizing the comparative benefits of flex to address specialized needs. However, flex space is no longer simply considered a less expensive office space option, nor is it considered a more expensive “image” warehouse. Corporate America has proven the benefit of flex space goes well beyond cheap and pretty.  Versatility and value more accurately define flex. 

John Coleman is Senior Vice President for The Alter Group and its property management affiliate, Alter Asset Management.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.