Investing successfully in flex space or “small bay industrial” properties requires extensive thought and due diligence. This involves evaluating various aspects of the property, from physical conditions to market dynamics. Below, explore our key steps and tips for navigating due diligence in this sector.
1. Property Information Collection
Begin by gathering all relevant documents and data about the property. This includes:
- Title Deeds and Ownership Records: Verify the seller’s legal ownership and identify any liens or encumbrances.
- Zoning and Land Use Permits: Ensure the property complies with local zoning regulations and is suitable for industrial activities.
- Environmental Reports: Review any existing environmental assessments to identify potential contamination issues.
2.Financial Analysis
Assess the financial performance and potential of the property:
- Income Statements and Rent Rolls: Analyze current income, occupancy rates, and tenant stability.
- Operating Expenses: Evaluate costs such as maintenance, utilities, taxes, and insurance.
- Capital Expenditures: Identify upcoming expenses for repairs or upgrades.
3.Market Analysis
Understand the local market to gauge the property’s competitiveness:
- Supply and Demand: Assess the availability of similar properties and the demand for flex spaces.
- Rental Rates: Compare local rental rates to determine if the property’s pricing is in line with the market.
- Economic Trends: Consider local economic trends that could affect how industrial properties perform.
4.Legal and Regulatory Compliance
Ensure the property adheres to all legal and regulatory standards:
- Building Codes and Permits: Confirm that all structures comply with local building codes and have the necessary permits.
- Environmental Regulations: Conduct a Phase I Environmental Site Assessment to identify potential environmental liabilities.
- Lease Agreements: Review existing leases for terms, tenant obligations, and compliance with regulations.
5.Physical Inspection
Conduct a thorough inspection of the property’s physical condition:
- Structural Integrity: Examine the foundation, roofing, walls, and flooring for defects.
- Mechanical Systems: Assess the condition of HVAC, electrical, and plumbing systems.
- Safety Features: Ensure fire suppression systems, alarms, and exits meet safety standards.
6.Tenant and Lease Evaluation
Analyze the existing tenant mix and lease agreements:
- Tenant Creditworthiness: Evaluate the financial stability of current tenants.
- Lease Terms: Review lease durations, renewal options, and rent escalation clauses.
- Tenant Improvements: Identify any tenant-specific modifications and their impact on the property.
7.Risk Assessment and Mitigation
Identify potential risks and develop strategies to address them:
- Market Risks: Consider factors like economic downturns or changes in local industry.
- Property Risks: Address issues such as deferred maintenance or environmental concerns.
- Financial Risks: Plan for potential vacancies and fluctuations in operating expenses.
Emerging Trends in Flex Space Real Estate
Staying informed about industry trends can enhance investment decisions:
- Ecommerce Growth: Increased online shopping has boosted demand for distribution centers and last mile delivery hubs.
- Sustainability: There is a growing emphasis on energy-efficient buildings and sustainable practices within the industrial sector.
By closely following these steps during due diligence and keeping an eye on market trends, investors can optimize the performance of flex space properties.
Content developed in conjunction with Cody Payne and Michael Tran of Flex Parks USA.
