In this newsletter, I am going to revisit our investment thesis and whether it still holds true twenty-four months after making our first acquisition under the name of Flex Real Estate.
When we set out to build the portfolio for Flex Real Estate, our investment thesis could be described in one sentence: “There is not enough small suite industrial space for the demand in the Midwest.” We came to this conclusion after studying the conditions in the flex and small-bay product across the Midwest and determining that, because of increased demand for this space, rents would rise, and there would be an opportunity to reposition the rent rolls of existing properties to capitalize on this increase. Additionally, we were supported by the fact that rents did not justify building a new flex product in most Midwest submarkets.
Small Bay Industrial Property
What's Stayed True From Our Previous Assumptions?
Rents did rise: Given the lack of new supply, in the Flex product, rents moved up sharply, from Q1 2024 to Q1 2026. Rents in major Midwest Flex Industrial markets that we are actively buying in, went from an average of $9.59 per square foot to $10.88 per square foot, which represents a 13.44% increase in two years. These markets include Columbus, Cincinnati, Cleveland, Detroit, and Louisville.
Flex Industrial Rents in the Midwest Markets of: Columbus, Cleveland, Cincinnati, Detroit, and Louisville
New construction was limited: In Columbus, for example, in the last two years, only an additional six million square feet of industrial space has been delivered to market, representing a 1.8% increase in inventory, and when you isolate it even further to flex product, there has only been a 0.5% increase in inventory. On a national scale, industrial inventory has increased by 3.77% over the last two years, with flex inventory increasing by 1.45%.
Multi-purpose space wins: We’ve executed around a dozen leases since the inception of Flex Real Estate, and the space uses are wide ranging from robotics companies to a Pilates studio. The key to attracting a wide range of tenants is having traditional rectangular spaces that can easily be reimagined for any use. Additionally, having traditional ingress and egress is imperative; we have looked at several buildings with common loading, and this would make leasing space more difficult, so we have avoided those buildings.
What Has Changed?
Debt is more available than it was in the past, making the process for finding acquisition lenders easier than before. Pricing has improved due to tighter spreads on debt in a more competitive market. What hasn’t changed is that the underlying fixed index rate has stayed flat over the last two years, with the most recent months of the Iran conflict particularly pushing up the underlying rates.
More operators: We were not the only group to notice the trends of small suite industrial, and this has brought new entrants to compete against us in the space, in theory driving pricing and making deals harder to find. I am seeing these groups shift away from single-family homes, multifamily homes, and self-storage investments; some have been priced out, and others have not performed as expected, so there is a need to pivot to a different asset class. The midwest average flex industrial sale price has increased from $87.66 PSF in Q1 2024 to $110.49PSF in Q1 2026, marking a 26.04% increase over the last two years.
Data Centers are disrupting supply for the industry in a big way. Sites that would traditionally have gone to a large industrial user for distribution or manufacturing are now going to data centers because data centers can afford higher land prices. Construction capacity is also shifting towards data centers due to demand. The other big factor is finding supplies for development. Data centers are built like a large industrial building and use the same materials and double up on critical items like HVAC units and utility infrastructure. Generators, for example, are said to have a 50-week lead time, leading tenants to have to wait to utilize space and putting new projects on pause.
I am constantly reevaluating whether our investment thesis is still holding strong, and as our portfolio grows, we get more data and experiences to reflect on. As it stands, the small bay industrial and flex space is still robust with very little new supply and strong demand. As of next week, we will be at 100% occupancy across thirty-five tenant suites, with consistent rental increases. Our mission is to expand this portfolio and generate great returns for our partners, and our selection of small-bay industrial and flex is on track to do just that. We have a busy May and June ahead with several opportunities under contract that I am excited to share more about soon.
Reply to this email and let me know if there are any specific topics you would like to hear about next. Thank you for reading, and stay tuned for the May Focus!
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