Welcome to the March 2025 edition of the Flex Focus Newsletter. Below, I will discuss the state of small suite industrial and why it is our acquisition target here at Flex Real Estate. I will also provide some notes I have after attending Scott Colbert’s presentation about the 2025 economic outlook. This month, I also had the opportunity to judge the CoStar Impact Award for Cincinnati. I am grateful the groups included wanted to make an impact on our local community by transforming Cincinnati and their businesses. I look forward to seeing who the winners are.
Andrew
Small Suite Industrial In February, the Wall Street Journal published an article that aligns with Flex Real Estate’s investment thesis. In the article, Half Price Books, a discount book retailer, is looking for a small warehouse space in Minneapolis to lease, around 6,000 square feet. Half Price Books has spent a year looking for a suitable suite and has not found an appropriate space. Spaces that fit their requirements are simply not available. We have heard this same story from local business partners in northwest Ohio. It's very difficult to find small industrial spaces right now.
At Flex Real Estate, our acquisition thesis focuses on acquiring industrial and flex industrial buildings with tenant suites below 100,000 square feet. Two of the key factors that explain why we are targeting this certain segment are high demand and limited new development.
High Demand
In Q4, US vacancy for industrial buildings below 100,000 square feet was less than 5%, and US vacancy was even more scarce below 50,000 square feet, at 2.5%.
Limited New Development
Only 8% of all new industrial development in 2024 was warehouses below 100,000 square feet.
Looking at these two numbers, I see that even though this small warehouse space is in high demand, the rents do not justify the cost of developing a building that accommodates the demand.
Below, I have charted the stats on industrial and flex buildings under 100,000 square feet in our local markets using CoStar.
The vacancy rates in Cincinnati, Columbus, Dayton, and even Lima, Ohio, all fall below the 5% described nationally. The under-construction number shows that there aren’t large swings set to impact the total inventory. These two numbers have us projecting increased rents in the future until developers justify adding more supply to the market.
We hope to acquire more quality properties to participate in this growth and provide quality spaces to our Half Price Books of the world (I hope they find a space because I am a huge fan!).
Side Note
A niche type of small-suite industrial building that is being developed, the garage condo, is an interesting phenomenon that does not directly add to the competitive supply but could have a greater impact in the future. The basic concept is a small warehouse unit with a roll-up door, a bathroom, and a lofted hangout area. The target audience is someone with a high income and a lot of "toys" (golf simulators, boats, cars, helicopters). This likely won't change the dynamics of the supply because the contractor garage is generally unable to compete on price for the luxury condo garage. You may start to see more of these luxury garage projects popping up adjacent to high-income areas.
Where I Am Getting More Information
In February, I attended the Construction Financial Management Associate meeting in Columbus. At this meeting, Scott Tolbert, the head economist at Commerce Bank, spoke about his outlook for 2025. His major takeaways in navigating 2025 are that there is a fog over the economy, waiting for Trump to roll out his policy. He projected that Trump's policies are slightly inflationary from the outset, and he believes they will spur steady forward growth in 2025.
Scott Tolbert 2025 Projections
GDP: 1.7%-2.2%
Core CPI: 2.8%
Unemployment: 4.2%
Employment Growth: 150K Per Month
Fed Funds Rate: Flat
10-Year Treasury: Flat
What I Am Reading
Investing in Real Estate Private Equity – Sean Cook
Sean Cook details how to evaluate real estate opportunities as a potential limited partner.
I am reading this to make sure I can better explain our Flex Real Estate opportunities to potential partners. I would highly encourage anyone investing in real estate to use this book as a tool to aid their investment decisions.
Reply to this email and let me know if there are any specific topics you would like to learn about next. Thank you for reading, and stay tuned for the April Focus!
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