Flex Industrial Real Estate Investing Explained

I grew up paving roads in Southern New Hampshire. My father ran a paving company, and for a stretch of my life that meant raking and pushing wheelbarrows of asphalt that came off the truck at 400 degrees. Then I finished college and watched how hard my dad worked. Seventy-hour weeks all summer. I figured there had to be a better way.

Here is what I noticed. My dad occupied a small warehouse building, and he had a gravel yard where he parked his equipment and trucks. And the work we did, day after day, was paving industrial parks full of other contractors just like him. Every one of those guys needed a building and a yard. Every one of them wrote a rent check every month. I remember thinking: I would rather own this real estate than rake hot asphalt. I would rather be the guy collecting the rent checks.

That pain is what pushed me into real estate. I started in manufactured home communities. Then, around 2017, I began to see how interesting the small-bay flex category could be. And I will be honest with you. At first, I did not even know what it really was.

What exactly is flex industrial?

That confusion is not unique to me, and it is not an accident. The traditional industrial world does a poor job of making clean distinctions. High-bay, mid-bay, small-bay, light industrial, contractor bays, multi-tenant industrial. These names get thrown around as if they mean the same thing. They do not. A high-bay distribution box and a small-bay contractor park are dramatically different assets, with different tenants, different risk, different operations, and different economics. The murkiness benefits the insiders. So let me cut through it. Here is the clean definition:

"Flex industrial is small, divisible, multi-tenant industrial space. Mostly warehouse, with a little office, sitting near a population center." — Jeremiah Boucher

That is the box. And the first discipline in this entire business is naming your box precisely. If you cannot define what you buy, you will drift outside of it, and you will end up owning something you do not know how to operate.

Why small, and why multi-tenant?

The single most important reason I want to own this product is simple. One large tenant cannot turn my lights off. Picture the opposite. You own a big box building with one tenant. That tenant leaves without a corporate guarantee. Now every dollar of cash flow walks out the door at once. You are still covering the taxes, insurance, maintenance, utilities, and interest, and now you have to find one new tenant willing to take down a huge block of space, which can take a year or more.

In a small-bay park, no single tenant is big enough to do that to you. If you have fifteen or twenty tenants and one leaves, you lose a slice of the income, not the whole thing. The cash flow bends. It does not break. That diversification is the entire point.

Small-, mid-, or high-bay: how the category sorts

• Small-bay. Small, divisible suites, lower clear heights, many tenants per building. Home to contractors, trades, local service businesses, and small distributors. This is Patriot's box.‍
• Mid-bay. Larger suites, taller clear heights, fewer tenants per building. A middle ground that can work, but the tenant pool narrows and the diversification weakens.‍
• High-bay. Large distribution and bulk warehouse, tall clear heights, often one or a few very large tenants. The institutional darling, but it carries the single-tenant risk I just described.

Inside small-bay: the product tiers

Small-bay itself is not one product. Once you are inside the category, it breaks down again by size, finish, and the tenant it attracts:

• Micro-bay. Under 1,250 square feet, often older, sometimes a shared bathroom and no office. The cheapest option for any business, and there is almost always a tenant for it.‍
• Economy contractor bay, or flex space. The basic building, 1,250 to 5,000 square feet, with an office and bathroom in each unit. The workhorse of the category.‍
• Premium flex. 2,000 to 10,000 square feet. Fancier facades, better visibility, more sophisticated tenants, more build-out inside.‍
• Flex condos. The same product, built or parceled off to sell to the end user rather than lease.‍
• Mixed-use hybrid. Office, retail, flex, and sometimes self-storage combined on one property.

Now the discovery inside those tiers that should drive your strategy. Above 4,000 square feet, the tenant pool shrinks. Targeting units under that size is how you get the highest rents/SF and the most users wanting the product. Our brokers at Flex Parks USA love the 1,800 to 2,000 square foot tenant, because that size attracts the largest tenant pool. In our own leasing, we have found the same thing. The asset is only as valuable as how productive it is to businesses, and the smaller functional unit is where the deepest pool of productive businesses tends to live.

The five build types

How these parks get built drives the tenant pool, the rent, and the risk. The cleanest framework I have seen comes from Cody Payne at Flex Parks USA, the industry leaders in flex brokerage and feasibility. Cody's framework in my own words, the five build types are:

1. The basic small-bay, or efficient build. The bare-bones version. Metal, CMU, or tilt-up concrete. Cheap to build and generic enough to appeal to a broad pool of local companies. Recommended for beginners.‍
2. The flex / showroom concept. A step up in design that draws the broadest tenant pool. Showroom tenants tend to build out their own space, which makes them stickier, and it may hold up better in a downturn.‍
3. The premium flex model. The high end space, serving retail, showroom, office, and light industrial at once. The most expensive to build and not recommended for a first-time builder.‍
4. The condo model. Units built to sell to the end user rather than lease. The exit can be lucrative, but once you sell, you are no longer the owner.‍
5. The hybrid model. A mix of the above on one park, often one use up front and another in the back. One caution: do not build a full self-storage facility on the same parcel as a flex park. It tends to hurt the sale value.

If you want the deepest technical version of this framework, Cody is the guy to study. I would also point you to BKM Capital Partners, an institutional leader in higher-quality flex in core markets, whose research does a clean job of breaking down what sets small- and mid-bay industrial apart. Me new book, Flex Industrial Investing, will also be available in Q4.

Long and short: define your box precisely, understand the tiers, and you have the operational foundation for most everything that follows. Next in the series: why the demand for this asset is structural, not a fad.

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