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COVER STORY, APRIL 2006
FLEX APPEAL
Flex space is an attractive option for office and small industrial users that are looking for the best of both worlds.
Nina Glickman
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Krusinski Co. built and renovated the Matrex Exhibits office/warehouse at 310 Church St. in Addison, Ill. The building totals 122,471 square feet and features 18,653 square feet of office space and 24-foot clear heights.
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Flex space has been around since the 1980s when it grew out of small industrial units. The increase in technology companies and small entrepreneurial businesses made flex space appealing, as it was able to incorporate offices with warehouse space, and include amenities such as docks and drive-in doors. Flex space was also utilized by larger companies that wanted to maintain a regional presence. “When a lot of manufacturing left the Midwest, a lot of these companies wanted to remain in the market,” says Norm Ross, vice president of industrial/commercial properties in the Buffalo Grove, Illinois, office of Arthur J. Rogers & Company. “[The companies could] have a presence without doing the actual manufacturing — [they could have] a showroom or warehouse. That was really the kicker that started [flex space] off.”
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The exterior of 1140-1152 N. Main St. in Lombard, Ill., a multi-tenant flex building totaling 50,200 square feet. Suite 1146 comprises 6,000 square feet, of which 2,554 square feet is office space. Cawley Chicago provided leasing services for the 100-percent occupied building.
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In the late 1980s, flex space was primarily focused along the Interstate 88 corridor (The Golden Corridor) in Chicago. Many Fortune 500 companies were located there and needed laboratory or light assembly space to work on projects. In the mid-90s, the technology boom converted flex spaces into single-story office spaces since the need for labs and assembly areas was dissipating. “It became a matter of engineer/software-types needing just an office space, a think tank, to try and create peripheral software for big product type,” says Daniel Cawley, president and principal of Cawley Chicago Commercial Real Estate, a brokerage firm based in Downers Grove, Illinois.
According to Steve Murphy, senior broker with Cawley Chicago, flex space is ideal for entrepreneurial companies that are incorporating office space, or development-type space that needs a type of office. Small entrepreneurial businesses in the Chicago area were able to utilize flex space and increase the quality of life for their companies. “People were saying, ‘Why am I driving to an office downtown every day, then getting in the car to get out to the warehouse when I can just put this whole thing [in one place],’” explains Adam Moore, vice president with Krusinski Construction Company in Oak Brook, Illinois. An additional benefit of flex was that communication between front office and warehouse personnel was more efficient, as both were under the same roof. “Flex space is ideal for start-ups — everything is together,” adds Ross.
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960 Industrial Dr. in Elmhurst, Ill., totals 68,900 square feet. Of the 9,000 square feet available for lease through Cawley Chicago, 3,070 square feet is office space. The property is managed by Rothbart Construction Realty.
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Current users include service industries, technology support companies and call centers. “What’s happening now is you’re going from an industrial-type environment to a more of a service industry-type of environment, and [from] that comes both the larger and smaller user downsizing,” says Murphy. Flex is often used as on offshoot of a corporate headquarters office or as a North American location for foreign companies wishing to have a presence in the market. Sales driven businesses also utilize flex space as a showroom or demonstration center. Small entrepreneurial companies are still finding flex appealing, and many biotech companies see flex as the ideal location for labs and R&D facilities. While flex space still remains broadly defined depending on the user, the majority of flex users have a minimum of 20 percent office space and are usually in the 30 percent office/70 percent industrial range. “You’re looking at a minimum of probably 30 percent office build-out,” Murphy says. Most flex users take around 5,000 to 15,000 square feet of space, with a maximum of approximately 60,000 square feet and the minimum as low as 1,500 square feet. Developers will also construct buildings around 150,000 square feet that are then divided down into smaller units. “The real sweet spots are probably around 5,000 to 15,000 square feet,” Moore says.
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Krusinski performed extensive due diligence for The Panasonic Factory Solutions Company building at 909 Asbury Dr. in Buffalo Grove, Ill. The 63,000-square-foot facility features 31,000 square feet of office and laboratory space.
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Flex space also lends itself well to office condominium development. “A lot of what goes into flex space is fairly specialized, so it’s hard for a landlord to amortize the building costs into a lease…there’s very little likelihood that whomever leases the space next will be able to reuse it,” Moore explains. “So it makes a lot of a sense for the condo development.” Users typically remain in flex for 3 to 5 years, with some remaining as long as 8 or even 10 years. “Flex leases tend to be longer than traditional office or industrial releases [because] it’s so much more specialized,” Moore notes. Ross has seen approximately 60 to 70 percent of his clients renew their leases and stay longer. Since build-out costs are amortized over the length of a lease, it is often more advantageous to the user to take a longer lease. “Your net rate, your build-out costs or whatever your landlord is passing on would definitely be lower in a 5-year lease [rather than] a 3-year lease,” Murphy says.
Ideally, flex spaces include at least one dock and one drive-in door, and tend to have a higher-end look in both the building and the landscaping. Attractive lighting, 18 to 24-foot clear heights, nice window lines and good parking are all desirable amenities in flex spaces. “People want conference rooms, a kitchen area, meeting rooms and open spaces,” Ross adds. Reasonable access to transportation and highways are also appreciated. The higher clear heights are a newer amenity. “Financially, people want to see the higher ceilings,” Murphy says. “[It also] makes the building a little more [accommodating] to who’s using it.”
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A laboratory in the Panasonic building.
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In terms of choosing flex space over traditional space in an office building, the main advantage is clear. “You can save a substantial amount in rent by taking office space in a flex building compared to taking office space in a strictly office building,” says Matt Panichi, an associate with Cawley Chicago. “There’s a lot of money to be saved.” Tenants also have the benefit of uses other than office space. “There are a lot of uses in an office where it’s not required to have an office, [such as] filing and storage space. When you go to a flex space, you can have a little warehouse space,” Ross says. Flex also often includes life safety components such as a heavier sprinkler system, as well as 24-hours-a-day, 7-days-a-week access to the building.
Construction of flex space is not unlike the construction of regular office and industrial space; in fact, flex could be considered a hybrid of the two. When choosing a builder for flex, Moore notes that it is often important to makes sure the builder or general contractor is familiar with both office and industrial projects. Someone who is familiar with both sectors “will have the best practices on both sides of the fence…[they’ll have more] experience with some of the nuances of industrial construction,” he explains. And since different users have different definitions of flex, a builder that is familiar with both components can often be of great assistance in planning the space. “When you’re a relatively new company, you think you know what your space requirement is. If that changes, most flex buildings can accommodate [it],” Ross says. Additionally, the new trend of second and third generation flex space being occupied is driving the demand for the rebuilding and redevelopment of existing space. Contractors can work with the new occupants to identify changes and create preliminary design studies so there are no surprises once the leases are signed. Redevelopment can also maximize the value of a lease and enhance the uses that the occupant can get from the space. “You can [take a building] that would be obsolete and gut it, redo the office area and make it fit the specific user,” Murphy says.
Vacancy rates for flex are typically lower than office. “For flex space in the Chicagoland area, we’re looking at about a 14 percent vacancy rate, compared with industrial, where we’re at about 9 percent, then office, [which is approximately] 20 percent,” Panichi says. Cawley notes that his firm leases flex properties “right at asking rate,” or approximately $8.50 per square foot. While industrial space rents for around $6 per square foot, it is often worthwhile for a user to “pay a little bit more per square foot for their industrial space and a lot less for their office space and have it all under one roof,” Moore says. Users can take advantage of the amenities, such as the docks or drive-in doors, and in the long run, wind up spending less on flex than they would for either office or industrial.
Currently, flex is seeing an increase in interest from office users, a trend that Ross attributes to the “non-manufacturing society” and the absence of a hard product. While flex is still driven by cost, it is also being pushed by the smaller companies that want spaces within proximity of the client base. “There’s a lot of product being built right now,” Murphy says. “Buildings are being built so they can be developed as flex, and build-out can be custom-coded to the requirement of the tenant.”
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