Flex Space in Industrial Real Estate: The Versatile Advantage You Need to Know

In our decades of experience as industrial real estate brokers in Orange County, we've seen firsthand the growing popularity of flex space. This versatile property type combines the advantages of both warehouse and office space, making it an increasingly attractive option for savvy business owners.

What is Flex Space?

Flex space, also known as industrial flex or combination space, refers to commercial real estate that can be used for a mix of light industrial, warehouse, and office functions. Typically, these buildings will have a combination of warehouse bays, high ceilings, and office areas all under one roof.

For example, let's say a $4,000,000 industrial building in Anaheim has a 60% warehouse and 40% office split. The warehouse component might have 24-foot clear heights, multiple dock-high doors, and ample power supply - perfect for storage, distribution, or light assembly. The office areas, meanwhile, can provide the professional workspace needed for back-office functions, showrooms, or research and development.

The key benefit of flex space is its flexibility. Tenants can often customize the ratio of warehouse to office as their needs evolve, without having to move to a new location entirely. This makes flex buildings an attractive option for businesses that require a mix of functions or anticipate changing space needs over time.

The Rise of Flex Space

Anecdotally, our team has already seen a notable increase in demand for flex space across Orange County. We believe that once the word really gets out about the advantages, flex will become the preferred industrial property type for many business owners.

Some follow the mantra that if the expected internal rate of return on the business is higher than the cap rate on the real estate, it makes sense to maximize the office component. Others prefer to have more warehouse space to handle inventory, production, or distribution. Either way, it was a winner.

For example, a $3,000,000 flex building in Santa Ana with a 60/40 warehouse-to-office split might generate $240,000 in annual rent. Assuming a 6% cap rate, that equates to a property value of $4,000,000 - a tidy 33% return on the initial investment.

Flex Space Advantages

So what makes flex space so appealing? Here are a few of the key benefits we've seen in the Orange County market:

Flexible Customization

As mentioned, the ability to easily adjust the warehouse-to-office ratio is a major perk. Tenants can start with 70% warehouse and 30% office, then flip that to 40/60 a few years down the line as their needs change.

Improved Efficiency

Having both warehouse and office under one roof streamlines operations and reduces overhead costs. No more shuttling between separate facilities for different functions.

Tax Advantages

Depreciation schedules for flex buildings are often more favorable than traditional warehouse-only properties. The office components, for example, are typically on an accelerated 39-year schedule versus 27.5 years for the warehouse portions.

Adaptability

Flex space provides the perfect solution for companies that need to scale up or down quickly. Whether expanding production, adding showroom space, or reducing office footprint, the flexibility of a combo building makes it easy to adjust.

Flex Space in Action

Let's look at a real-world example to see the financial impact of flex space. Take a $4,000,000 building purchased in Anaheim with a depreciable basis of $3,000,000 after subtracting land value. If 60% of the building is warehouse (27.5-year depreciation) and 40% is office (39-year depreciation), the annual depreciation deduction would be around $120,000.

Assume the property is in the 37% federal income tax bracket. That $120,000 deduction translates to a tax savings of $44,400 per year - a significant boost to the bottom line. Over a 10-year hold period, the total tax savings would be $444,000. That's the kind of immediate return that makes flex space so attractive.

Conclusion

In our book, the versatility and financial advantages of flex space make it a no-brainer for many Orange County businesses. At absolute minimum, you should immediately consult an experienced industrial real estate broker to explore how this flexible property type could benefit your operations.

Stay tuned for more on the ins and outs of industrial real estate fundamentals. In our next post, we'll dive into the pros and cons of single-tenant versus multi-tenant industrial buildings.