Industrial buildings may be a great investment, but they can be difficult to understand and assess. This can make it even more difficult to start investing in these flex industrial spaces.
For both the beginner and experienced real estate investor, multi-tenant flex space can be a gateway into the industrial real estate space. It is highly versatile in its use and the types of businesses these spaces can house.
Although similar, there are specific differences between commercial real estate and industrial real estate. While commercial real estate typically involves properties such as multi-family units, offices, or retail stores, industrial real estate involves properties where goods are made, stored, and shipped.
Flex space can be loosely defined as any building that combines a warehouse space and office or retail space. These units often have a warehouse door or loading dock and higher ceiling height. Normally, this maximum ceiling height is between 14 to 24 feet, allowing them to be used for additional storage. For example, there can be a designated showroom or retail space.
Industrial buildings come in all shapes and sizes. Because they have a wide variety of uses, these properties can be desirable to an array of businesses seeking a space for their operations. Potential occupants include a range of industries, from manufacturers to e-commerce companies. Another benefit is that is that businesses have the ability to expand in the same business park without having to relocate their entire facility.
Because of this vast array of properties, it may be overwhelming for an investor looking to acquire this type of asset. To make it easier for commercial real estate investors, all industrial properties are split into three different asset classes: warehouses, manufacturing facilities, and flex space. These are also sometimes categorized as manufacturing, storage and distribution, and flex space. Within these categories, there are further sub-asset classes.
Warehouses are typically larger buildings with limited windows, many truck doors, loading bays, and docks, some include front office or retail space.
General warehouse/bulk distribution. When most people think of warehouses, they likely picture general warehouses. These may be one or multiple stories – usually through the addition of mezzanine levels – and could have small office or showroom spaces. Their general purpose, though, is to hold items for storage or reshipment. Bulk distribution centers serve a similar purpose but often are used to store large quantities of a single product. They usually have features such as conveyor belts, packing and shipping machines, and robotic arms. Most of these types are near transportation hubs like airports, ports, and railroads.
Cross-Dock/truck terminals. A truck terminal or cross-dock facility typically has little storage space, replacing them instead with a large number of truck docks. This allows trucks to be unloaded or reloaded, facilitating the movement of products along the supply chain.
Cold Storage. This type of facility is essentially a refrigerated warehouse. This is used to ship food and other perishable goods, so these properties have temperature control to keep items cool or frozen. In addition to food, cold storage can be used to hold agricultural products, artwork, or pharmaceutical items, among other things.
Hazardous Material Warehouses. This type of building is used to store flammable, corrosive, or otherwise dangerous materials. They often include special features to protect workers and the surrounding community from these hazards.
Specialized and distribution warehouses. Some properties are designed for specific types of materials, such as art, automobiles, or wine. These are specifically configured to the type of items they will hold.
While manufacturing facilities frequently look like warehouses from the outside, they are built differently than the typical warehouse. Specialized buildouts and heavy power connections are not uncommon in this type of industrial property. Manufacturing can be further divided into two categories: heavy manufacturing and light assembly.
From factories to extremely complicated structures like chemical plants and oil refineries, heavy manufacturing facilities are a necessary part of our economy. Heavy-duty goods like cars or outdoor equipment begin in a heavy manufacturing building. These properties can range from hundreds to thousands of usable square feet and usually contain heavy-duty, customized equipment, three-phase electricity, and a lot of loading dock space.
Depending on the company’s needs, they may also have further customized features, such as specific drainage systems, ductwork, ventilation systems, chemical lines, and more. This type also tends to require top-to-bottom renovation when it changes tenants because of the permanent fixtures needed for specialized heavy manufacturing. Examples of businesses that might use this type of facility include aircraft and automobile parts manufacturing, furniture manufacturing, or outdoor equipment.
Meanwhile, light assembly buildings are typically smaller and may even house multiple tenants. These tend to be simpler and easier to move into because the interior is often easy to reconfigure. Equipment used in these buildings is typically lighter and more portable because the parts being assembled here are smaller than those made in a heavy manufacturing facility.
Some might be built similarly to warehouses, as well. They may include some storage components to house the goods until they are shipped. Some examples of businesses that might use this type of manufacturing facility include electronics manufacturers, toy companies, and furniture assembly.
Other types of industrial buildings are called “flex spaces.” These properties are specially designed to serve multiple purposes and are often customized to the business needs. Office space tends to occupy more than 30% of these buildings and has more parking than other industrial buildings, making them a better fit for startups.
Examples of flex industrial spaces include warehouse/office combinations or showroom/warehouse combinations. Both feature a warehouse space, often at the back of the building, with client-facing areas at the front.
Within flex spaces, there are three subtypes of specialized properties: research and development, data centers, and showrooms.
Research and development, or R&D, is the process by which companies create new products and improve existing ones. Companies need specialized spaces to develop and test, which may include everything from clean rooms to light manufacturing space or open square footage. Many R&D spaces are converted to campus-like business parks with shared architecture design, lots of surface parking, and well-landscaped open spaces.
A data center is where a company keeps the equipment needed to maintain network connectivity and store its data or client data. These tend to be very large and require special wiring and cooling systems, as well as reinforced floors to hold the weight of the equipment. Another feature common to data centers is that they almost always include backup generators and extensive security systems.
Showrooms encompass what most people think of when they imagine flex industrial spaces. They are a combination of offices, warehouses, and formal showrooms for a company. In most cases, half of the area is used for showcasing and selling products to the public. The rest is often administrative offices and warehouse space used to store the products on display. Examples include kitchen and lighting galleries, large furniture showrooms, and car dealerships.
With so many types of flex industrial spaces and the various sub-asset classes within those categories, the process of choosing which property is right for your portfolio can be difficult. Investors looking to get into this part of the commercial real estate market could benefit from researching and understanding the type of tenants and work that goes into maintaining these properties.
For those who prefer a more passive approach to investing, a private equity firm can do most of the work for the investor. Avistone has been investing in a variety of commercial real estate markets since its founding in 2013. Since then, the firm has acquired over 4 million square feet of space in various states nationwide, including California, Texas, Georgia, Florida, Ohio, and Virginia. Our executive management team has more than 100 years of combined experience in the industry and has the unique ability to integrate extensive capital market knowledge with a boots-on-the-ground approach.
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