During the go-go days of the warehouse/industrial market, which peaked in 2021 and 2022, developers seemingly could not construct buildings large enough and fast enough to satisfy the requirements of end-users. The real estate industry, however, is cyclical and now, the industrial market is seeing the rise of a new and very different product: the micro-flex facility.
Schilling Circle in Hunt Valley.
Designed specifically for use by either a single tenant or several tenants, the typical building ranges in size from 15,000 to 40,000 square feet and features bay depths of approximately 120 to 200 feet. This emerging asset class is constructed using tilt-wall methods or arrives on-site as a pre-engineered metal building.
Several factors are driving the market dynamics for micro-flex industrial buildings including: the lack of single-tenant-use buildings available for acquisition by end-users; the historical lack of new supply due to their higher construction costs; the associated rental rates required to justify their construction; the very low availability of these smaller buildings available for lease; and the lower risk associated with their construction and shorter leasing window.
Larry Goodwin, Managing Principal, 1788 Holdings, believes new sub-50,000-square-foot light industrial buildings (aka micro-flex properties) are warranted in many primary and secondary markets as the vacancy rate for light industrial space in this size range continues to be below five percent (and often under three percent) in this segment of the market.
Users who need these smaller spaces often cannot find any to suit their needs, Goodwin said. “There is also a segment of these smaller users that, while small, will pay the additional rent required for the bells and whistles that come with higher-functionality new products, such as higher clear heights, but, given the tightness of the market, they are being forced to accept space that does not match their needs.
“Many of these same users also have a need for Industrial Outdoor Storage (IOS) space, which can help to juice the returns to the developer and lower the overall rent burden for the user/tenant,” he said. “Moreover, the strong value proposition of the IOS space tends to make the tenant stickier in the long run.”
Micro-flex buildings are not a new concept but over the past 10 years or so, this asset class has taken a backseat to the intense focus among institutional investors and developers on large-scale industrial/warehouse product to satisfy large e-commerce users. Now, according to many familiar with the product type, micro-flex is experiencing a revival.
Micro-flex facilities are transforming the local economy by addressing a critical need for flexible, small-scale spaces, said Patrick Smith, Vice President of MacKenzie Commercial Real Estate Services.
“Unlike the oversized bays offered by many legacy developers, these units are ideal for startups launching their first venture or for larger companies establishing satellite locations,” Smith said. “This asset class serves as perfect branch offices for established firms or incubators for small manufacturing businesses, fostering innovation and growth.”
Smith said he is encouraging clients who own older low-rise office buildings to creatively repurpose their space into micro-flex facilities. He points to a project currently underway at 222-224 Schilling Circle in Hunt Valley.
“The minimal improvements required to turn over these often fully conditioned spaces allow for shorter lease terms, broadening the prospective tenant base and attracting diverse businesses,” Smith added. “This model not only supports emerging entrepreneurs but also strengthens our community’s economic resilience.”