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COVER STORY, APRIL 2005
THE JOY OF FLEX
Flex space no longer is considered to be simply a less expensive option to leasing office or industrial space.
Gregg Metcalf
As the old saying goes, “You’ve come a long way, baby.” Flex started out as a low-cost alternative to office or industrial space, allowing startups and small entrepreneurial firms to collocate regional offices with distribution or light assembly operations. Today, flex space routinely features fully air-conditioned spaces, 22-foot clear ceiling heights in the warehouse areas, ESFR sprinkler systems, fiber optics and masonry construction as well as tilt wall.
So what is the official definition of flex? According to CoStar, it is “a type of building designed to be versatile, which may be used in combination with office (corporate headquarters), research and development, quasi-retail sales, and including but not limited to industrial, warehouse, and distribution uses. A typical flex building will be one or even two stories with at least half of the rentable area being used as office space, have ceiling heights of 16 feet or less, and have some type of drive-in door, even though the door may be glassed or sealed off.”
Because of their lease rates ($3 to $4 cheaper than single-story office space), flex buildings used to be considered budget space only for budget-conscious companies, but now companies increasingly are utilizing their comparative benefits to address specialized needs.
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One of the flex buildings at The Alter Group’s 106-acre Chattahoochee Corners, located on Peachtree Industrial Boulevard in Duluth, Georgia. The park’s first three phases have 627,291 square feet of office and service-center space. The completion of Phase IV will give Chattahoochee Corners more than 1 million square feet of quality flex/office space.
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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, down from $10 in 2003. Since 2001, national rental rates for flex consistently have gone down as vacancies have trended up. (The only exception is between the third and fourth quarter of 2004 where vacancies improved from 16.2 to 15.9 percent). In the Southeast, vacancies stand at 16 percent with rents averaging $8.14. Compared to pure office product and pure industrial product, these numbers are not pretty; a big part of the anemic flex market might be due to the fact that technology users account for a high percentage of flex space and were also the hardest hit by the recession. In addition, some flex tenants took advantage of the market to trade up to Class A office space, which was at a steep discount. As we continue to recover, we eventually will see stabilization and rent growth in the flex market once again, with a slow climb beginning in the fourth quarter of 2005. Vacancies will improve similarly.
With the exodus of money from Wall Street into real estate (I’m guessing Donald Trump and “The Apprentice” have played a part in whetting people’s appetites for real estate as an investment), all product types relatively are 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 they draw big spenders from the institutional and REIT worlds. Interestingly, among smaller industrial buildings that mostly fall in the flex category, cap rates are in the 8.13 to 8.57 range.
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, it can create a showroom with a mezzanine. On the other hand, if it needs a distribution house for parts, it can use the 18- to 22-foot ceilings to stack inventory as much as three pallets high. Other advantages over more traditional office buildings include:
1. Tenants control HVAC and hours of operation.
2. Tenants have direct access to space without going through a common area.
3. Tenants control security of space;
this is an advantage for both
personal security and corporate
security. Limited access points
make it easier to record all ingress
and egress to the building.
4. Tenants can mix office and
distribution functions at one
location eliminating redundancy
in office support services.
5. Flex space is much less expensive
than traditional office space.
In Fort Lauderdale, U.S. Imaging Solutions just moved into a new flex building. The company had expanded at one point and separated its executive and sales offices from its warehouse operations. U.S. Imaging Solutions CEO Sean Guerin commented that certain business synergies were lost, and to consolidate all operations in the future was imperative.
In Atlanta, Simmons (the mattress company) currently has both warehouse space and separate Class A office space. The company may follow the lead of U.S. Imaging Solutions and many other national companies, as rumors suggest that Simmons is looking to consolidate both uses into a flex building.
Another recent transaction in metro Atlanta that affirms the versatility and value of flex space was MedEx’s recent expansion from 25,000 to 45,000 square feet at The Alter Group’s Chattahoochee Corners business park in Duluth, Georgia. MedEx occupies a dock-high building, which maintains a prestigious office building appearance from the front but still offers the versatility of distribution space. Once again, image, combined with practical features, is the allure.
Flex space no longer is considered just less expensive than the office space option. Nor is flex space considered only a more expensive “image” warehouse. Corporate America has proven that the benefits of flex space go well beyond being cheap and pretty. Versatility and value much more accurately define flex.
Gregg Metcalf is vice president of national development for The Alter Group. He directs The Alter Group’s build-to-suit activity and property development initiatives throughout the Southeastern United States.
©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.
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