Friday, May 22, 2015

3 Reasons WHY FLEX commercial real estate so HARD to Lease or Sell

Image Attribution: www.som.com
Flex commercial real estate, AKA research and development buildings, AKA industrial buildings with too much office space!

Just WHY are they so incredibly difficult to lease or to sell?

This post will provide some insight into why this product category too often finds itself on the Island of Misfit Toys.

Background: When Reagan was POTUS...some of us were brokering in those days...before the widespread use of desktop PCs, the internet, and mobile devices, etc., we lived in a mainframe world of large, bulky, power devouring computers which required tons of space. The design, manufacture, and assembly of these behemoth machines required a huge building footprint from which to operate. Commercial real estate of the day was ill equipped to house these employee heavy, image conscience operations. Industrial buildings generally lacked the parking, image, and amount of office/assembly space that the typical R and D guy needed. Traditional office space was absent the manufacturing and assembly areas..as these uses needed heavy power, truck loading doors, high bay warehouses, etc. Commercial real estate developers, during the decade of the eighties, saw an opportunity to produce space (R and D/flex buildings) that would accommodate the high tech computer uses of the era. R and D buildings...which later were named flex buildings...are a hybrid of an industrial building and an office building.

So with that brief historical snapshot, what makes these buildings so difficult to lease or sell when they lay fallow?

The office space doesn't meet today's needs. A typical flex building would have 30-50% drop ceilinged, air conditioned office space. If the total building was 100,000 sf...30,000-50,000 sf of office would be included. The proportionate employees that would occupy that space would be 90-120 folks. Engineering, clerical, sales, accounting, managerial types are not office bound anymore...they can work from their basement in their bathrobes or from a flat in Sri Lanka. Today's office environment includes fewer space hogs...computer servers, management heavy production teams, phone switches, and large desks and credenzas and is conceived in a more open collaborative setting. The days of giant private offices or of dark back office dungeons with no outside light are reserved for Madmen. Converting the old eighties styled office layouts to today's open concepts is expensive...many owners don't have the funds to invest in an upgrade...so they make the decision to see what tenant comes along  that may be less costly to re-purpose. Why not just eliminate some of the office space and convert it to warehouse, you may ask?...not so easy as much of the space was built as a second story. You can remove it but what's left is unusable as office OR warehouse.

The pool of users got smaller. Computers are MUCH smaller and require less real estate. Much of the guts of today's technology is manufactured in cheaper off-shore locations. So, fewer companies require flex space. What about the modern day tech companies, you may ask? One tour of a Google, Microsoft, or Amazon campus will quickly educate you upon how differently these tech giants work and collaborate today.

The industrial space lacks amenities. Too often the industrial portion of these R and D buildings was designed with a single purpose in mind...manufacture and assembly of electronic components. Consequently, warehouse clearance is skinny...no need to stack very high, loading is compromised...the raw materials and finished products were small so most arrived and departed in small trucks that didn't need dock high loading doors. Rarely is any outside yard storage or staging available...as outside area was reserved for employee parking...plus, the components were too valuable to store outdoors, anyway.