Flex Space Development - Still Viable?

Question

I may be a little late to the game but I've been hearing about how hot flex space is for a few years now and currently considering undertaking a new flex development project here in central Florida. I've identified a 2.25 acre properly zoned greenfield parcel with offsite retention that looks like will yield around 20,000sf of buildable area across multiple buildings. All utilities and power appear to run adjacent to the parcel.

I think the market for small bay flex space is right around $15/SF NNN and I would want to achieve a 10% cap rate going in and an 8% cap exit. Therefore I need to be at $150/SF all in including land. I don't think that's doable unless its a bare bones metal building which the city may not allow and which would also not command $15 rent.

Here is my expected cost:

Land: $475k

Acquisition Costs (Environmental, Survey, Geotech, Traffic Study): $25k

Soft Costs (Engineering, architect, impact fees, permit, legal, closing costs, taxes, interim interest): $300k

Site Development Costs: (Earthwork, underground utilities, curb cuts, fencing, stormwater, paving, landscaping): $800k ($400k/acre)

Subtotal before vertical costs: $1,600,000 ($80/SF).

This only leaves $70/SF for vertical costs which I don't think is feasible. The metal shell package will only be $30/SF but by the time you add in foundation, slab, MEPs, doors/windows and framing and any sort of architectural facade I think the vertical cost will be well over $100/SF. Maybe developing flex space made sense three years ago when construction inputs were significantly less but not sure it really works today. I have been speaking to the folks at Hamza Invests and they are confident that it can be delivered for much less based on my land costs but I don't want to fork over the money for their program and find out my instincts were right.

Anyone here able to shed some light on this?

Henry Clark · Answer

Would get with a local engineer to do the layout and an estimate on costs.

Your buildable sqft seems really low.  An acre is 43,560 sqft.  Unless you have a triangle or real weird shape, you should get more buildable square feet.  You noted your water retention is off site, so that gives you more buildable space.

Your soft costs are extremely high.

Site development is way over.

Have the engineer do a line item estimate to build out.  Tell him you want a square or rectangular building site, at the maximum building allowed.  Determine the type of customers you want though.  That will determine parking, access into doors, outside storage, etc.

Get the Building manufacturer or construction company to do the building prints and not an independent engineer.  This will save a lot of cost.

Get the Construction Company to be the General Contractor on the entire site.  In the future if you plan to do this again, you can do most of the planning and managing.

Cole Bigbee · Answer

Flex is a great long term play! As @Henry Clark mentioned, your soft cost and site work seem high. I would dig into that further and get a breakdown. Don't be afraid to get a separate civil engineering firm instead of just contracting with an architect to handle all. Just let the architect handle the Arch and MEP drawings. This will save you some markup since the civil plans would be the costly of the two. I would imagine your site work costs is strictly a budget since you have not had any civils completed. It might be a good idea to tie the site up as long as you can to get some soil testing and at least some preliminary drawings done by the civil engineer to see exactly what the site work costs will be.

Evan Polaski · Answer

@Bennet Sebastian, have you spoken to any industrial/flex space brokers to understand true demand in that submarket?  Since you are not in the space, I would start there.

I would also talk with a flex-space builder/GC to understand their typical costs?  I am seeing a new industrial development going up for $165/psf (not including land) all in, less land.  This is tilt-up concrete panel building (so not your basic metal tin).  But, I am sure there is a significant economy of scale and this is a 232k sq ft, not 20k.

Gabriel Graumann · Answer

@Bennet Sebastian the concept is still as sound as in years past, even more so now in most major metros as nearly all new development in the warehouse/flex space has catered to larger tenants or single-users of 25K+ SF. A few reasons for this, but the most common is tied to the currently high cost of land and development compared to the rents that can be achieved. This is why many projects are currently on hold unless they have an end-user on contract to lease the space. I watch for these deals in the WA Seattle/Tacoma market and the AZ Phoenix metros, and the same issues exist in both. Florida and Texas are no different, other than slight difference in lease rates. However, construction and material rates are fairly close across the nation.

The only half decent deals I've seen within this sector that make it financially feasible is to find an existing warehouse that could be converted to smaller spaces if possible, which helps cut down on time the property remains unleased. Good luck, and send a connection request if you want to discuss more.

Ronald Rohde · Answer

I think your numbers are on, its a profitable play in that leasing risk in good areas is essentially 0. Its not a spec play, it will lease up +- $15NNN.

You need to dig deeper on a site plan, coverage, off site detention is great, that should push your FAR up.

Flex Space Development - Still Viable?

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