In almost every commercial real estate discussion, the same major asset types—office, industrial, retail, and medical—remain the focus. One asset type that often gets lost in the shuffle yet pulls in the best characteristics of the leading asset types is the flex office. This shapeshifter of real estate can take on any end use you can imagine, making it an extremely desirable class of commercial real estate to manage, lease, and own.
Flex office never seems to fit into the conversation but should be a broader part of our commercial real estate discussion because of its resilience. Flex office buildings typically are not glamorous or expansive like other classes. But they can pivot between classes to adapt to economic pressures, changes in the industrial landscape, and even emergencies like the COVID-19 pandemic.
“Today’s flex office market offers such variation of the product,” says McKenzie Edgar, CPM®, senior property manager with Lincoln Property Company, AMO®. “Like industrial, flex office has been exceptionally strong even through COVID-19 and the aftermath of the pandemic. It never went away, unlike office and retail, and there was no restructuring required as a result of the hybrid work-from-home approach.”
Flex office space has remained a viable option for owners and tenants due to its sheer versatility. For potential tenants, flex office parks are more popular than ever, as they provide the space and the short-term contracts desirable to everyone, from new startups creating home bases with expansion opportunities to existing businesses seeking suburban logistics locations.
Versatile from the start
So, what’s in the DNA of flex office that makes it so versatile? The flex office originally was designed to be a smaller subtype of industrial space that could easily be woven into the suburban landscape. As cities expanded into suburbs, real estate developers were challenged to design and build buildings that would fit into smaller neighborhoods, where the desire for home ownership had led much of the workforce. Companies followed to these areas where employees were close at hand. During this time, the market was highly industrialized, and the U.S. was manufacturing goods domestically, so flex offices needed to combine industrial capabilities with office space in a contained area.
To make these assets fit, they were typically constructed to look industrial with the flexibility of interior demising to allow for easy expansion and contraction of space. Flex office design features included tilt-up walls for rapid construction, 14’ to 20’ clear ceiling heights, favorable light industrial zoning, truck courts and surface parking, and thoughtful placement along railway spurs and transportation corridors to maximize product movement. Conceptually, this allowed for a small office footprint in the front and light industrial or warehousing in the rear to incubate business. These benefits caused flex office to sweep the nation, fostering small to medium industrial growth.
The evolution of flex
Over time, economic policies shifted, and industrial manufacturing started drying up as companies began favoring overseas production. Despite this economic change, flex office leaned into the “flex” part of its name and began to transform.
As light industry waned, flex offices adapted to fit the changing needs of the public by harvesting the best design features from retail and office spaces. The warehouse component shifted from manufacturing to storage and logistics, utilizing the clear height for vertical racking of completed goods. The flex office asset modernized to compete in today’s market and demand dynamics. Today’s flex office still allows for light manufacturing but remains desirable for storing and distributing finished goods and third-party logistics.
One of the most significant advantages of flex office space is reduced operating costs for owners and tenants. Lease structures are typically lower than competing products and utilize triple net (NNN) recoveries. This structure provides rent concessions to entice leasing without waiving operating expenses during the same period, benefiting ownership.
Additionally, flex office doesn’t require common area maintenance beyond building-specific equipment rooms, eliminating the onus on ownership to provide amenities. Yet amenities—including breakrooms, restrooms, fitness centers, and conference space—can be built into the individual tenant space during construction, further reducing recoverable operating costs.
Finally, offices can be constructed to mirror Class A office space, with perimeter enveloping windows for natural light, skylights, and side lights, allowing for the open middle space to be utilized for more modern collaborative spaces or amenities while maintaining an onsite warehouse component. The ratio of office and warehousing can be equally flexible based on business needs and can include up to 100% office utilization based on the need for warehousing versus administrative needs.
Flex office also yields opportunities for additional cost savings by changing the methodology of property management. These spaces operate best with an off-site management approach with routine visits from building maintenance staff and security services to ensure the project is being serviced. Flex spaces also present a nearly 100% leasing opportunity to ownership. This is because they lack amenities or common spaces, except for common maintenance or building system rooms, which are minimal in flex office.
There’s no indication that tenants’ desire to take advantage of flex office assets will slow anytime soon, and the new suburban flex office products coming online often outpace other forms of commercial real estate.
“It’s advantageous to have flex, particularly in this economy, because you have the flexibility,” says Edgar. “You can customize it to whatever you need. This makes it open and adaptable to what’s going on right now in the market and our industry. It’s a positive and desirable product for anyone to have and to utilize as a catalyst for business growth and viability.”
As market conditions, technology, and business patterns change, the one guarantee is that flex office will adapt to those changes to maintain relevancy in a crowded real estate market.