Industrial Space Gets Flexible
While more traditional flexible industrial space has been available for years, the latest spin adds flexibility in lease terms and size.
In industrial commercial real estate news and trend analysis, the spotlight is nearly always on the big players — both in terms of investors and tenants. Most industry organizations tend to focus on Amazon’s leasing activity, or Prologis’ latest acquisition, or how developers can’t keep up with supply in certain markets. But that’s not the only place interesting or impactful things are occurring.
One of the emerging trends in industrial real estate relates to flexible space. Flex industrial space in and of itself is nothing new, as far as terminology goes. Buildings that could serve multiple purposes for multiple tenants have been around for decades, but today’s “flexible” space reflects major changes in leasing terms.
How Does Flexible Industrial Space Work?
You can almost think of it in terms of how the office market has shifted in recent years. Office leasing today is very different than it was 10 years ago, especially for smaller companies and startups which may not wish to commit to throwing down a sizeable part of their cash flows to cover five- or seven-year leases. Enter coworking: In a flash, the entire leasing model changed for those working across different locations or in a hybrid model where a company may need 10 desks today, 100 tomorrow, and 50 the day after that. Coworking providers stood to benefit from this fluctuation in office use and built their business model around it.
Today’s flexible industrial space isn’t exactly the same thing, of course. If you have a manufacturing or warehousing operation, your space requirements likely won’t change much day-to-day, as it’s less reliant on how many people you have working than it is on how much product you’re building, storing, or shipping.
But if you’re a new manufacturer, or you’re starting a new shipping company, your space needs may very well change month-to-month. It’s a difficult ask for a young e-commerce business to commit to a seven-year lease for space that’s too small or too large. Even supposing you can wriggle out of a lease agreement, moving your place of business can be prohibitively expensive.
Case Study
The myriad possible uses for flexible industrial space can be seen in how providers in the industry operate. Take ReadySpaces, one of the largest operators of this kind of flexible space in the U.S., for example. The company has around 30 open or planned locations across the country, and it leases spaces typically ranging from 250 to 5,000 square feet to its customers for a minimum of 90 days, typically, requiring about one month’s notice to end an agreement. True, this isn’t as flexible as office space, but — again — it broadly doesn’t need to be to add significant value compared to a years-long lease agreement.
The company itself leases space from industrial real estate owners, effectively subleasing to its own customers — very similar to how a WeWork or Knotel operate. Providers like ReadySpaces also generally offer access to office space — most industrial users do require space for office functions, after all — and other amenities, including ever-important loading docks, drive-in doors, and even Wi-Fi. Even forklifts, pallet jacks, and other standard equipment are typically available.
Long-Term Viability
This newer type of flexible space has yet to stand the test of time, however. That said, as industrial space comes at a premium across the country, and more and more users are seeking less and less available space, this type of business model could prove a lifesaver for smaller industrial users hesitant to commit to a pricey, long-term lease.
Related Questions
What are the benefits of flexible industrial space?
Flexible industrial space can provide a number of benefits, including improved efficiency of operations, increased usable square footage, and safer loading operations. According to this article, flexibility is a critical factor for industrial properties, as it allows them to be adapted to different tenants with different needs. Additionally, this article states that column spacing is an important factor in industrial properties, as it can impact the configuration of warehouses’ storage racks and make loading operations safer and more efficient.
What types of businesses are best suited for flexible industrial space?
Flexible industrial space is best suited for businesses that require a lot of storage and distribution space, such as cold storage facilities, pharmaceutical storage facilities, and research labs. These types of assets are more expensive and require experienced property managers, so it is best to partner with someone with a wealth of experience in these areas. General distribution space is a relatively safe bet with low barriers to entry for first-time industrial investors. Industrial Investment Hits New Heights and Joint Ventures are good resources for more information.
What are the advantages of leasing industrial space?
Leasing industrial space can provide a number of advantages for businesses. It can provide flexibility, as businesses can often negotiate shorter lease terms than with other types of real estate. It can also provide cost savings, as businesses can avoid the upfront costs associated with purchasing a property. Additionally, businesses can benefit from the tax advantages of leasing, such as deductions for rent payments and other expenses. Finally, businesses can benefit from the ability to customize their space to meet their specific needs.
For more information, please see the following sources:
What are the drawbacks of leasing industrial space?
The main drawback of leasing industrial space is the higher monthly costs as opposed to those in double or single net lease structures. Furthermore, since tenants become responsible for taxes, this puts them on the hook for any tax-related liabilities such as fines and penalties. Additionally, in some cases landlords may still be responsible for the roof and structure of the property, which can be quite costly should repairs be necessary. Earning caps, which are commonly found in many triple net lease agreements, prevent a landlord from increasing rent prices beyond a set point. This can result in a loss on future earnings if property values rise. Even though most triple-net tenants are heavily vetted, the risk of a default still exists — and vacancies can cause additional cash flow issues for investors who would face costs that tenants normally pay.
Source: Benefits and Drawbacks of a Triple Net Lease (NNN) in Commercial Real Estate
What are the different types of industrial space available?
The different types of industrial space available are manufacturing, warehouse, industrial parks, flex/hybrid, top MSAs, tertiary markets, and Class A, B, and C. This article provides more information on the types of industrial space in demand. This page provides a list of the different types of industrial property loans available.
What are the best financing options for industrial space?
The best financing options for industrial space depend on your individual situation. Generally, you can explore options such as CMBS, Life Company, Bank Loans, and Small Balance Loans. Loans start at just $1,000,000 with amortizations as long as 30 years and leverage up to 75%. For more information, our advisors can connect you with a wide variety of lenders to get a quote at no charge.