The Synergy of Self-Storage and Office Industrial Flex Real Estate

What is Office Industrial Flex Real Estate?

Office industrial flex properties mix office and warehouse space in one building. These buildings usually have a small office area at the front, about 1,000 to 2,000 square feet, and a larger warehouse at the back, around 2,000 to 3,000 square feet. They're designed for businesses needing both administration and operational space. Common tenants include contractors and logistics companies, which require space for office work and storage.

These buildings resemble larger self-storage facilities with concrete floors and metal frames, stretching up to 20,000 square feet. AAA Storage has been developing such projects for over 10 years. They’re often situated in the same areas as self-storage units. Businesses typically move from using smaller storage spaces to these flex offices as they expand, allowing for a seamless transition. There is great synergy between self-storage and office industrial flex—providing a path from storage to larger operational spaces.

Why Diversify with Office Industrial Flex?

Diversifying with office industrial flex properties offers several advantages. While self-storage has long been favored, adding flex properties spreads risk. Including various property types in a fund helps withstand market shifts better than a single property type would.

Flex properties cater to businesses (B2B) rather than consumers (B2C), making them less subject to the same demand fluctuations as self-storage. This difference provides a balance in risk profiles. Additionally, construction processes for both property types overlap, saving time and resources. Typically divided with about 60% investment in self-storage and 40% in flex spaces—this mix remains attractive and balanced.

This diversification acts as a hedge against market volatility while tapping into the inherent strengths of both property types. For experienced investors, it’s an opportunity to leverage their expertise efficiently. By balancing focus and resource allocation, investors optimize without overextending themselves.

How the Market Looks for Flex Properties

Flex spaces boast high demand with a national vacancy rate of only 4%, indicating that these facilities maintain high occupancy levels. Beyond traditional business needs, these properties in places like Austin accommodate unconventional tenants like sports clubs and recreational enterprises, demonstrating flexibility and broad market appeal.

The e-commerce boom and changes in office space requirements from remote work trends positively impact this sector. Flex spaces meet dual needs in office and storage, attracting diverse business types requiring centralized, adaptable locations.

When it comes to investments, office industrial flex spaces offer yield on cost typically higher than self-storage, marking them as a financially sound choice. While cap rates for these properties might be a bit higher, their potential profit margins are more promising. This aligns with a recent surge in investment interest due to improved economic stability.

What the Financial Picture Looks Like

From a financial perspective, office industrial flex spaces provide stability through longer leases compared to the month-to-month nature of self-storage. Such leases are often triple net, meaning tenants cover taxes, insurance, and maintenance costs—adding predictability and stability to cash flows.

Over the property's lifetime, consistent cash flows enable strong cumulative returns by capitalizing on enduring demand and high occupancy. Market trends indicate upward growth fueled by new businesses, tech expansions, and logistical needs. As the landscape changes, flex spaces' core advantage of versatile space continues to hold appeal.

Despite market shifts, the basics fueling interest in office industrial flex remain solid. High internal rates of return (IRR) achieved in past projects highlight the potential returns on investment. Exceptional returns like IRRs north of 1,000% are rare but illustrate the substantial upside available to projects that effectively meet market demand.

Key Considerations for Investors

Investors looking at office industrial flex spaces should understand the tenant dynamics and lease structures. Unlike self-storage, longer lease terms—typically 3 to 5 years—are common, and often incorporate gradual rent increases of 2-3% annually. This ensures progressive revenue over time. The triple net structure also minimizes operational costs for the investor, offering a more hands-off approach compared to self-storage.

Market analyses suggest that demand for flex spaces will remain strong. Shifts towards localized logistics hubs due to online shopping trends—along with businesses' need for flexible office setups—make these properties valuable.

Evaluating geography is essential. While urban environments offer greater exposure, suburban markets often present untapped opportunities with growing business communities and the need for localized support centers. This is especially true as businesses decentralize from traditional business districts.

Conclusion

Balancing self-storage with office industrial flex real estate is a savvy strategy, offering diversity and growth potential. Both property types are resilient and meet varied market needs, making them a strong combination for investors. This mix doesn’t only address risk, but also taps into both types' strengths. For those seeking stable, growth-oriented investments, the synergy here is compelling. This approach strategically positions investors for the present market and future opportunities. This dual-value proposition allows portfolios to capitalize on economic shifts while maintaining a robust performance profile across varying market conditions.