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Is FLEX Commercial Real Estate a Good Investment? | RefineRE

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Is FLEX Commercial Real Estate a Good Investment? | RefineRE

Should you Invest in FLEX Corporate Real Estate?

At the most basic level FLEX corporate space is a building that accommodates different types of use and provides each tenant with their own private space. The earliest examples of FLEX space were industrial sites where manufacturers have warehouses, production lines and offices all together at one location. Today, a FLEX corporate building can be located far from industrial areas right in the middle of a city or even the suburbs.

Our Corporate FLEX Space Guide is a great place to start if you are becoming familiar with this type of property and what it has to offer a CRE portfolio.

Although FLEX space is a relatively new concept it’s catching on quickly for good reason. Flex corporate space caters to many different types of business from micro-size startups to huge conglomerates. The adaptability of FLEX space makes it easy to utilize for a wide variety of purposes. That has helped FLEX spaces stay in demand even as the pandemic decreased the need for other types of corporate real estate.

FLEX corporate space is also in demand with investors. Portfolio managers that have been tracking data since the start of the pandemic have taken note of the dramatic uptick in FLEX leases. They also understand how shifts in the way we work and do business have permanently changed, and FLEX space is well-suited for the new normal.

Given that there are clear benefits for tenants and corporate building owners, FLEX space will likely continue to expand, which means there will be more opportunities for investors. RefineRE is here to help investors add to their portfolio with tools like the FLEX module that make it easier to analyze this new type of property.

Considering the Advantages of FLEX Corporate Space

FLEX space is unlike any type of corporate real estate in that it isn’t clearly defined, which is an advantage in many instances. This key distinction also leads to a number of other advantages that can make FLEX corporate space a very attractive investment. 

  • FLEX spaces fit a large range of business types, which makes this type of CRE more resilient through downturns and unexpected events like the pandemic.
  • FLEX space owners enjoy lower vacancy rates. As of January 2022, the vacancy rate for FLEX space was just 6.2% down from a low 6.3% in the previous month. Low vacancy rates are largely due to the large pool of possible tenants.
  • Small, medium, and large companies still need office space, they just need a more flexible office space that allows for expansion and a hybrid work model. This has made FLEX space a more desirable option even in office buildings.
  • Some types of FLEX space tenants tend to be long-term renters. This is often the case for companies in the research and development industry.
  • Most FLEX spaces cost less to customize and improve compared to traditional office spaces. This is a benefit to both the tenant and the landlord, both of which may absorb those costs.

There are also some pretty significant advantages for tenants as well, which is why FLEX corporate space is in such high demand at the moment. FLEX space allows a business to be more agile in terms of what it can do and its ability to pivot when needed. This type of property also gives businesses a way to lease less space that minimizes operating costs. Instead of having to pay for space that all tenants share, FLEX space suites are completely private and self-contained so tenants aren’t paying for space they may not use. Scaling up is easier as well, especially given that FLEX space leases tend to be shorter than average and offer space to expand.

All of these advantages existed long before the pandemic. That’s why according to JLL the FLEX space footprint began growing globally by 22% a year over the previous decade.

Is Flex Space a Good Corporate Real Estate Investment?

There’s a lot of buzz around FLEX space, but is it a trend that will last? Is FLEX space a good corporate real estate investment in the short and long-term?

FLEX corporate real estate investing can be an excellent opportunity for those that are looking to expand their portfolio. Demand is high but you also have to know who is looking for a FLEX lease and what type of FLEX space is needed in your target market to determine if it’s the right investment to make. 

Is CRE a good investment in 2022?

Before considering whether FLEX corporate is a good investment it’s important to step back and determine if investing in any kind of corporate real estate is a good idea in 2022. Part of the reason there’s buzz around FLEX space investment is due to strong performance in 2021 during the COVID pandemic. 

While some property markets like retail and traditional office space suffered during the pandemic, 2021 saw prices increase at an unprecedented rate in other real estate markets. The National Association of Realtors (NAR) recently reported that two-thirds of residential real estate markets had double-digit appreciation in 2021, and the national average was 14.6% year-over-year. Multi-family units reported annual rent growth that averaged 13.5% higher y-o-y.

FLEX buildings were another type of property that experienced substantial gains in 2021.  On top of appreciation gains, FLEX corporate properties usually earn more money for your investment than a residential property. JLL’s reporting found a huge spike in demand for FLEX space during the pandemic, and 41% of tenants stated they plan to utilize more FLEX space in the future. That demand helped FLEX asking rents increase 6.8% last year.

So, the answer to the question of whether corporate real estate is a good investment in 2022 is, it depends. Based on the latest CRE data, if you plan to invest in FLEX corporate space it could prove to be a very good investment for years to come.

What type of FLEX corporate property is most profitable?

Data analysis has proven that FLEX corporate properties are a sound CRE investment at the moment. The real question is which type of FLEX space will likely be the most profitable.

A Sizeable FLEX Space Building

Properties that are able to produce the highest returns on investment are generally the ones that have the greatest number of tenants. Sizable FLEX space buildings that can house a lot of tenants also provide a safety net in the fact that you aren’t reliant on one type of tenant.

Property That’s a Blank Slate

FLEX spaces that are blank slates are preferable much of the time. Tenants are looking for spaces that are easy to customize or can adapt to different needs. Spaces that aren’t built out for a particular purpose and are multifunctional will help attract more tenants.

Leasing FLEX Corporate Space to Tenants

Who’s looking for FLEX space to rent? It turns out there are a lot of companies that are expanding with FLEX space, transitioning to it as their work strategy evolves and starting out with flexible leases to minimize overhead cost. The wide pool of potential tenants includes any business that needs space to accommodate a hybrid workforce or a combination of office/retail and warehouse space. 

Local Small Businesses

There are advantages to leasing FLEX office space that can help out local small businesses that don’t have the biggest operating budget. FLEX spaces that are centrally located and provide easy access for customers are particularly appealing to local small businesses that are starting out.

Growing Companies

Startups and small businesses that are growing have a lot of interest in FLEX space because it allows the company to limit overhead cost while still being able to expand in the future as the business grows.

Research and Development Companies (H4)

Research and development (R&D) companies are the traditional FLEX space users. These types of companies typically benefit from having multiple departments together in one location. There are also companies working in the pharmaceutical, biopharma and other research fields that need space for laboratories and testing.

Manufacturers (H4)

Manufacturers are another tenant that has utilized FLEX space for quite some time. Office space for executives and administrators are usually located within the manufacturing plant not far from the assembly lines and warehouses.

The Cost of a FLEX Space Lease

The leasing terms of FLEX space is a major plus for both the landlord and the tenant. FLEX space tends to have shorter lease terms and a more affordable price per square foot. In many markets tenants can find FLEX space for less than half the price per square foot of office space. As such, there is no shortage of companies looking for FLEX property to lease.

The way FLEX spaces are leased deviates from traditional corporate leasing. As already noted, tenants don’t have shared spaces like lobbies and hallways. They each have spaces that are completely their own and are privately accessed. However, that isn’t the only key difference.

Triple Net Leases on FLEX Corporate Space

FLEX spaces are changing business property paradigms, particularly through how leases are structured. With FLEX space it’s common to have a triple net (NNN) lease. The price per square foot of the actual leased space costs less, but in a triple net lease the tenant also helps pay a portion of the taxes, insurance and common area maintenance costs for the property. Maintenance costs can include utilities, parking lot upkeep and landscaping.

It’s a very advantageous leasing structure for landlords. Under a triple net lease the only expense the landlord has to make sure to have covered is capital expenditures.

Shorter Lease Lengths

One other leasing distinction with FLEX corporate space is the length of the lease. FLEX space leases are often much shorter than leases for traditional office and retail space. A traditional office space is usually leased out for 7-10 years. It locks both parties in for a very long time. FLEX spaces, on the other hand, usually have lease terms that range from 7 months to 3 years.

How to Invest in FLEX Corporate Real Estate

Any type of corporate real estate investment requires careful consideration. When it’s a relatively new type of CRE there’s even more to consider.

What investors need is reliable data that clearly shows trends in the FLEX space market and tools that can compare FLEX space leases in a local area. Data reduces the unpredictability of investing in a new type of real estate and provides benchmarks for comparing deals. It’s the information you need to determine if FLEX corporate space is the right addition for your portfolio.

FLEX is just one of the corporate real estate solutions from RefineRE. Ready to join the countless organizations including a flex option in their portfolio? Hop on a no-obligation 15-minute consultation with one of our CRE experts.

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