Investing in Flex Space

John Harcar (00:00.825)
Hey guys, welcome back to the show. I’m your host, John Harcar, and we’re here today with Cody Payne. And what we’re going to be talking about is investing in small industrial flex space. Hope I got that right. Hey, remember guys, at Investor Fuel, you know, we help real estate investors, service providers, and really all real estate entrepreneurs, 2 to 5X their business by providing resources and tools to help grow the businesses they want to grow and live the life that they want to live. Cody, welcome to our show.

Cody Payne (00:30.254)
Well man, I appreciate it. Thanks for having me.

John Harcar (00:32.333)
Yeah, man, I love hearing and learning about new topics. And I’m looking forward to talking about FlexSpace. Self-admitted, I have very little knowledge on this. But before we get into all that and get into the weeds, why don’t you tell our audience a little bit about you, maybe what you did before, how you got into FlexSpace, and what got you here?

Cody Payne (00:52.214)
Yeah, no, mean, it’s a very simple story and I’ve been doing it for about 20 years and, you know, started with a very small local firm and DFW obviously. And then just slowly built a team over time and have a great set of guys here that, you know, we work all over Texas, all over the US. you know, before that, before I got into real estate, you know, I…

go to college. I’ve always been a big car guy so I went and sold cars at Westway Ford. So if you’re in DFW there’s a small chance if you bought a car 20 years ago at Westway Ford you could have bought it for me maybe I don’t know and so I’m sure your payment was higher than it should have been but no so I started there and you know

John Harcar (01:14.553)
Okay.

John Harcar (01:23.991)
You might have bought it from Cody.

Cody Payne (01:36.194)
went to several real estate shops. A lot of them didn’t want to hire anybody straight out of high school or without a college degree. But luckily, there was a guy here in Arlington that gave me a shot. And I worked for him for about 10 years. And then we went to Marcus and Millichap. And now we’re at Colliers. We’ve been here for about five or six years. And so just continuously expanding on the small bay flex side all across the country, it’s one of the hottest asset classes. And it’s the place to be right now.

John Harcar (02:01.431)
So when you said you were kind of going around, and a lot of people I’ve known made transitions from card to real estate, just because that ability to talk to people. But when you were talking about shops you were going around to, were these commercial investment firms? Were these realty firms? What were they?

Cody Payne (02:14.328)
yeah, yeah. There were commercial real estate firms and so there’s a lot of real estate firms, especially commercial real estate firms in DFW. There’s almost a shop on every corner it seems like now and so you got a lot of private shops, regional, national, things like that, international and so there’s lots to choose from but not a lot didn’t want a kid from Grand Prairie, I can tell you that.

John Harcar (02:29.326)
Haha.

Sure.

John Harcar (02:42.327)
Why not, you think?

Cody Payne (02:43.822)
You know, I think that it’s a very tight niche, especially back then 20 years ago. You gotta keep in mind, I mean, it was a very tight niche kind of community and, you know, a lot of those guys had degrees or came from maybe wealthy families or something like that nature. And, you know, I was a little more raw and uncut. so, but, you know, I had grit and determination, you know, I wanted to work. And so I was able to find a job. Yeah.

John Harcar (02:49.113)
Sure.

John Harcar (03:10.309)
And you got the shot, right? You said you had one guy that opened it up. Another curiosity, why commercial real estate versus, you know, what a lot of people do, residential, flips, or even maybe multifamily stuff?

Cody Payne (03:23.918)
You know, I had met a guy that was in commercial real estate. He had a very nice car, very nice outfit. you know how like you see that when you’re younger and you go, you know, I want that. And I asked what he did. And he told me, and I said, man, know, it seems like good career. goes, oh, you do fine in it. And so I sold him a, actually he was buying a F-150 there.

John Harcar (03:32.761)
Yeah, of course, of course.

Cody Payne (03:52.896)
So yeah, it worked out well.

John Harcar (03:53.379)
See, and that’s kind of the thing of that transition, know, that the skill transition from selling cars to getting into real estate.

Cody Payne (04:00.814)
I think it’s a big thing because when you get into commercial real estate, really any real estate, I mean there’s a lot of rejection involved, right? Nothing prepares you for rejection more than car sales could. I mean because those guys, some people look at car salesmen as like the scum of the earth. And so when you get treated a certain way and then you come over to this, it’s so much easier. It’s so much easier to get rejected. yeah, yeah.

John Harcar (04:08.854)
sure.

John Harcar (04:12.43)
Yeah.

John Harcar (04:24.121)
Yeah, you built up your Rhino skin. You got that thick skin now. I just had a question and it just shot out on me. But the cool part is that you found your niche, right? You found something that you were passionate about, right? Because you saw the proof of concept maybe through this guy. So tell us about FlexSpace, small bay FlexSpace. I like I said, my knowledge is very limited.

Cody Payne (04:44.898)
Bid.

Cody Payne (04:48.8)
So I mean, it’s, you know.

for the longest time it was really not looked at by larger real estate funds, institutions, things of that nature. Because a lot of tenants aren’t high credit, lot of leases are maybe one to three years. But what it is is typically it’s spaces that are maybe two, three, four, five thousand square feet, as low as a thousand square feet. Mostly warehouse, maybe an office, restroom, and that’s about it. But very good efficient spaces and what makes them flexible

is if you have that ability to expand somebody, say you have a bunch of 2,000 square foot units, you can expand it from two, four, six, eight, or back down. But really the biggest key that has really helped this asset class over the past few years is it’s a very good inflation fighter.

John Harcar (05:28.345)
Got it.

Cody Payne (05:41.438)
asset class and what I mean by that is when a tenant leaves it’s not like office or retailer multifamily where you sometimes have a lot of capital that goes back into those spaces for refinishing out you know this is very close to self-storage where not I mean that’s not as this you know self-storage you go and you sweep it out and you’re yeah this

John Harcar (05:51.477)
Mm-hmm. Mm-hmm.

John Harcar (05:57.209)
And you’re done you’re good yeah a couple nicks couple scratches that’s all right

Cody Payne (06:02.966)
Yeah, and so this one, the turnover cost is relatively cheap overall. But also your tenant pool is very wide, it’s very vast. It’s not just comprised of a subcontractor base like it used to be five, 10 years ago where was electricians, landscapers, things of that nature. Now you’ve got gyms going in there, all sorts of fitness studios, commercial

John Harcar (06:23.001)
Mm-hmm.

Cody Payne (06:32.94)
kitchens. mean it’s a hosts a wide variety of businesses that it hasn’t before and that’s what’s really helped it explode as well.

John Harcar (06:42.819)
business opportunities. Yeah. Why do you think that it’s been exploding? mean, what do you see as the backbone of why people are transitioning money from other commercial stuff into this flex space?

Cody Payne (06:54.434)
Well, I think they’re below the line item. Costs are substantially cheaper a lot of times. So the capital that goes into the space is your TIs, commission things of that nature. Traditionally aren’t as high here. So it allows for a higher cash flow. Rental rates continue to trend upward across the country in flex. It’s not just in one state, but it’s an overall number. So I mean, there’s a lot of benefits to it.

You know the e-commerce sector affects it a lot. know there’s a lot of little e-commerce businesses in these places that you never saw before and so just the diverse tenant pool the you know ease of leasing you know all these things have really just helped us trajectory more and more. It’s where all your other asset classes are kind of the same right there’s nothing that’s really like evolved in it. It’s where this one has and so now it’s not uncommon to have like retail little retail tenants in here not now.

John Harcar (07:28.109)
Mm-hmm.

John Harcar (07:45.624)
Yeah.

John Harcar (07:51.651)
Mm-hmm. Yeah, you’re not gonna get the big box stores. Yeah.

Cody Payne (07:51.712)
international, you’re not going to get a TJ Maxx or something in there. But as far as the smaller time guys, they are in there. so it’s got a very diverse tentacle, I think is probably one of the biggest keys.

John Harcar (08:01.614)
Yeah.

John Harcar (08:06.987)
Okay, and so basically when someone comes in and they’re renting, let’s say they have a small retail shop, right? They’re bringing in all of their, you know, furniture, all their stuff and you turn it over, you gotta do is paint and floor. For the most part, correct?

Cody Payne (08:20.62)
Yeah, because for the most part, I mean, obviously it depends on the deal you work out with the tenant, but the standard finish out on a lot of these is one office and a restroom. And in many cases, the tenants put their own money into it if they do, or if not, that’s just how it stays. And so when they leave, I mean, maybe there’s some touch-ups here and there, but it’s very low turnover costs relative to most of the real estate assets.

John Harcar (08:26.861)
Sure.

John Harcar (08:30.681)
Mm-hmm, that’s it.

John Harcar (08:45.613)
So what are the pros and cons of the flex space versus traditional commercial space?

Cody Payne (08:49.951)
I the, I mean like I said, the pros are, you know, really all those things we talked about, you your…

Tenant pool the effect that they’re leasing it, you know, the lease velocity is very very good So whenever a space comes up for lease, it’s not sitting on the market for a long time a lot of these lease up fairly quickly the cons I will say Would be for people that maybe you look for Like single tenant net lease assets that one zero management zero anything, you know You know, obviously there’s a little bit more management involved in this right you do have tenant turnover You do have you know?

John Harcar (09:04.76)
Mm-hmm.

Cody Payne (09:26.416)
You do have common areas and of that nature. The good news is a lot of these are on triple net leases now and are continuously being converted over to it, so that does help out quite a bit. But yeah, but it really depends on your investment strategy, right? And so…

John Harcar (09:36.447)
You answered my question. Thank you.

sure.

Cody Payne (09:44.046)
You know if you’re looking for you know hands off this and that I mean obviously you can hire management company They can take care of it But it just depends on your investment strategy because somebody actually asked us the other day the like hey, you know We invest in Singleton and at least industrial now their rate of return is less But their management everything else is also less as well and so It just depends on

John Harcar (10:03.043)
Sure.

Cody Payne (10:08.106)
strategy that you want if you want to be a little more hands-on if you want something you know if you want something you can improve I mean you know it depends on on the strategy there.

John Harcar (10:10.359)
Man, yeah, your threshold, it’s like…

John Harcar (10:17.507)
Yeah, it’s just like someone buying rental properties, right? It’s like, do you want to manage it, or do you want to get a property management?

Cody Payne (10:21.048)
Yeah.

Well, like a long time ago, when I first got in the business and the market crashed in 2008, I was investing in homes and duplexes because that’s all I could afford at that time. And I tell you, I have no interest in doing that anymore. mean, that was a very management intensive deal. And it’s probably where I bought the homes to, weren’t the best areas.

John Harcar (10:35.159)
Mm-hmm.

John Harcar (10:42.681)
Hmm.

Cody Payne (10:47.534)
you take that and it’s like okay, but the return was actually pretty good, but it had a high intensity of management. That’s how commercial real estate is, is it’s risk and management. is how I look at it.

John Harcar (10:56.108)
Sure.

John Harcar (11:00.953)
Okay, and you say you’re working for Colliers, that’s a commercial broker? Okay, do you buy and do you any hold of these personally?

Cody Payne (11:05.494)
Yes, sir.

Cody Payne (11:11.082)
Absolutely and we do syndications as well but yeah we’re very involved in the small bay flex industrial side. We’ve even done some storage here as well. We’re not storage guys though but we did build a boat and RV facility in Weatherford years ago yeah.

John Harcar (11:20.757)
Okay.

John Harcar (11:27.253)
Nice. How do you find these flex properties? mean, if someone obviously can reach out to a call yours or reach out to whoever, but let’s say someone wanted to start their own business, how do they find these flex spaces?

Cody Payne (11:43.95)
I mean, if someone’s looking to purchase a flex investment, a lot of times they can just call us. Obviously, you can go on Loopnet, Coastal, whatever. I’ll probably say probably 35 to 40 % are off market. So being entrenched with a broker that knows it, knows the owners, thinks that nature is probably going to be your best way to get into it. But not all off market deals are the best deals either.

John Harcar (12:05.517)
Yeah. Okay.

Cody Payne (12:13.154)
But yeah, just immersing yourself into it and finding out who are the kind of go-to guys for those markets, that’s gonna be your key to success.

John Harcar (12:21.185)
Okay, is there any specific way that or things to look at when you underwrite it? You know, just make sure it’s a deal type of thing.

Cody Payne (12:28.75)
Yeah, mean you want to understand the market, you want to understand the tenant velocity, the time on market for lease, you want to understand your competition, you want to understand the amenities that this building has and maybe the competitors have because you can add amenities to these parts, right? You can add side yard storage, you can add mezzanine space, I there’s a lot of little things you can do. So we always say understand the competition first and then how do you diversify yourself from it, right?

John Harcar (12:57.785)
Sure.

Cody Payne (12:58.704)
different than than brokerage or raising money or anything like that it’s you know because there’s I mean look there’s how many commercial real estate brokers like myself or in the US I mean there’s thousands upon thousands so it’s how do you diversify yourself and why should we use you and it’s no different than you owning a small industrial park is why should these tenants come here as compared to other competitors because there’s always gonna be competitors out there and you don’t want to play the commodity game where you’re just like who has the best rent right you want to offer

John Harcar (13:08.121)
yeah.

John Harcar (13:20.739)
True. Yeah.

John Harcar (13:28.54)
Right. Yeah, and provide value. No, and it’s also too a lot. think a lot now in the real estate world all over is just that rapport, building that connection with people that are going to be renting your space. If someone wants to get into, well, let’s go back real fast. What do you think are some of the common mistakes that people are making when they’re into looking into flex space and those type of things?

Cody Payne (13:28.684)
good superior product. Absolutely.

Cody Payne (13:53.826)
I think the biggest mistakes that we’ve seen, and I don’t want to call them mistakes, but hurdles that maybe people see is people going to develop it when maybe they should have bought existing.

John Harcar (14:04.694)
Okay.

Now what do you mean, develop it? Okay.

Cody Payne (14:09.26)
like when you want to go build it new. just want to go build new construct, you want to go buy land, construct and do all this and that. know, constructing one of these parks, it can seem simple from the outside, but when you start building it, maybe dealing with city code, know, construction contractors, I mean, there’s just such a long period of time where you’re just dealing with, you know, various people that you’re not making any money on because it’s under construction. And so there’s a big misconception on that that I think people see that they think they can

John Harcar (14:22.379)
Hmm.

John Harcar (14:32.375)
Yeah, right. Yeah.

Cody Payne (14:39.194)
build it and make more money but you right now with interest rates and know timing to build and lease up time if not done properly you know we’ve seen it many times where somebody could have just bought a project that was already cash flowing and they would have done significantly better.

John Harcar (14:54.869)
Sure. And what are some good resources that folks could use if they were, if they, know, obviously they can call you, but if they wanted to get into it, what kind of resources would you recommend? Or maybe even stuff to study on.

Cody Payne (15:06.412)
Yeah, yeah, no, so there’s a really good book out called Flex Space Domination. It’s actually a book that we wrote, but it’s a really good book that…

John Harcar (15:15.225)
Selfless plug. That’s okay.

Cody Payne (15:18.062)
Yeah, you’ll have to check it out. Yeah, but it’s a good book that is for beginners getting into it. Also, our site has a great library of stuff on there from tools to education stuff, flexbusinessparks.com. That can help you out as well. there’s actually quite a few podcasts and other materials out there too that I mean like with anything if you’re looking to invest in it, I’m sure you can Google it and find some more. But there’s not like one go-to

John Harcar (15:46.553)
Okay.

Cody Payne (15:48.008)
space there’s not like a association or anything like self storage and apartments and all that have I mean it’s still it’s not a newer asset class but it’s still up and coming.

John Harcar (16:00.365)
Do you see any trends or anything specific of kind of where that part is going, that asset class is going?

Cody Payne (16:08.076)
I mean, look, it’s been trending very positively across the board over the past seven years. And I think it’s going to continue to do well because of the tenant base, because of how diverse it is, because it’s pulling office, retail, light industrial, all these tenants from all these other asset classes that it didn’t do before. And it tailors really well around new home construction areas, areas that are seeing growth and

John Harcar (16:30.264)
right?

Cody Payne (16:38.0)
and positive demographics. So I think it’s got a very good future and it still has a long way to go before it. I mean, there’s areas that I can tell you that see oversaturation like anything, but overall I think it’s got a long way to go, several, many, many years.

John Harcar (16:41.005)
Mm-hmm.

John Harcar (16:52.889)
Sure.

John Harcar (16:57.177)
Yeah, and I think the more expansion that goes on, like I’m in Boise, Idaho, and expansion here is huge and I see flex spaces all over the place. So.

Cody Payne (17:05.218)
now because they’re even doing like car garages with them condos things that nature so me it’s a very diverse asset class to not just the tenant pool and so there’s a lot of different avenues that you can do within it to find success

John Harcar (17:13.165)
Yep, very much.

John Harcar (17:19.585)
Now, let’s say I want to jump into Flex Space. What do I do? Give me some advice.

Cody Payne (17:24.206)
Finding a good agent that understands it, knows it, if you’re gonna build it, obviously need to entrench yourself in that stuff. Finding good contractors, surrounding yourself with the right team, not going in, you know, solo-wise.

John Harcar (17:37.41)
Okay.

Cody Payne (17:40.194)
But obviously there’s plenty of people that invest in it too if you want to LP it. There’s plenty of ways to do that also. But I think finding a good expert that can help you understand the pros and cons and best practices is going to be the key there.

John Harcar (17:56.769)
And if I’m going into a virtual market, let’s say I want to go do something in Fort Worth, I want to buy FlexSpace or do FlexSpace in Fort Worth, how do I go in that market and find the right person to talk to?

Cody Payne (18:07.468)
You know what’s funny is a small bay industrial is a very tight niche asset class. There’s not a lot of brokers in it. So you can Google and find the broker pretty easily. Yeah it’s not yeah it’s not like hey I’m looking for a realtor to sell a house. I’ll just Google realtor and 10,000 pages come out. Like it’s a very tight it’s very similar to self storage. There’s not a lot of people that do it.

John Harcar (18:18.357)
Okay. Okay.

John Harcar (18:25.881)
Right.

John Harcar (18:32.952)
Right. Is there a lot of information like online? Let’s say I want to go to YouTube you and do that. Is there any information for? OK, OK. And then funding wise, I mean, what type of funding is available for people buying flex space? Is it kind of the same thing as?

Cody Payne (18:38.498)
Yeah, absolutely. Yeah, absolutely.

Cody Payne (18:48.222)
It’s very similar. mean, you people are getting traditional debt, know, mezzanine debt, construction loans. mean, it’s very traditional. love small bay too, I’ll tell you that. Well, they like it because it’s doing very well amongst most commercial real estate assets. And so…

John Harcar (18:59.001)
Why?

John Harcar (19:08.857)
Okay. As far as like continually like less defaults, mean, how does it…

Cody Payne (19:15.594)
less defaults, good occupancy rates, and so for the longest time before COVID, banks loved office space. Now they kind of want out office space, but they look for things to invest in and to lend money on. so with multifamily having some issues, office having some issues, some of these other asset classes having some issues, they look at this as a very good and viable asset class.

John Harcar (19:23.481)
Yeah.

John Harcar (19:41.525)
Awesome. Okay. And what sets you guys, what sets Collier’s, what sets you, what sets you apart from all the other people that smite or small tight little niche?

Cody Payne (19:51.83)
You know, I think that we’ve been doing it for a very long time. We got a very good grasp on it. And one thing that we actually pride ourselves in is we continuously go around the country to educate private equity, know, real estate funds, institutions on this asset class. And so we continuously bring in new people to the asset class that have never been in it before. So these untraditional buyers and many times can be some of your highest paying buyers on the sales

John Harcar (20:15.938)
more.

John Harcar (20:21.721)
Sure.

Cody Payne (20:21.744)
But then also we’ve got a great team here that continuously scours the markets, talks to owners, know, figures out, you know, who’s looking to sell, maybe off market, on market. So anytime somebody calls and is looking for something, we always have opportunities for them. Yeah. It’s never dry over here, John. Never dry over here.

John Harcar (20:36.767)
Awesome. Man, that’s a never dry over there. And I love it. And I learned a lot regarding flex bass. I mean, it sounds like something that I might want to put some money into. But we’ll talk about that maybe off off air. But if folks want to learn about flex bass, maybe buy some flex bass or just have overall questions, what’s the best way they can get a hold of you?

Cody Payne (20:59.566)
Flexbusinessparks.com, that’s where I’d go to start. You can contact me or any of the guys on there.

John Harcar (21:06.425)
flexbusinessparks.com. And what we’ll do everybody is we’ll put all the links and social media and whatever stuff that you’ve sent to us. We’ll put it in the show notes. So you have to check that out. I appreciate your time today. I mean, it was a great conversation. I know there’s probably a ton more we can continue to roll on about. But you know, if you guys want to get into FlexSpace, reach out, know, reach out to Cody, pick his ear. Maybe he might be able to find your property.

Cody Payne (21:08.557)
Yes, sir.

Cody Payne (21:21.688)
Yeah.

John Harcar (21:35.065)
Cody, thank you again, man. I really had a great time. no prob. Guys, I hope you learned a lot, and we’ll see you on the next episode. Have a good one.

Cody Payne (21:38.026)
Absolutely, thanks John for chit chatting me.