Flex Space and Small-Bay Industrial Feasibility Study

The term covers several products that lenders underwrite differently. Office-warehouse space is a single-story building with 15 to 40 percent office finish and the rest warehouse, typically 18 to 24 feet clear, with grade-level or dock-high doors, leased in units of 2,000 to 15,000 square feet. Contractor bays are smaller units, 1,200 to 5,000 square feet, with a roll-up door, a restroom and a small office, let to trades and service businesses. Multi-tenant small-bay parks combine both in buildings of 20,000 to 80,000 square feet divided into 8 to 30 units. Industrial condominiums are the same units sold rather than leased, usually to the businesses that occupy them, with an association carrying the common areas. Cowarehousing and shared industrial space, where an operator leases a building and subdivides it into short-term units with shared docks and offices, is a business rather than a real estate product, and the study treats it as one. Refrigerated small-bay space is underwritten as cold storage, on the cold storage feasibility study page.

What these products share is turnover. Tenants are small, leases are three to five years, renewals depend on the tenant's own fortunes, and the landlord releases units every year. The operating statement carries management, leasing commissions, tenant improvements and a vacancy and credit loss allowance that a single-tenant warehouse never sees. The study's job is to put the right numbers on each of those lines.

Small-bay space is the tightest industrial segment in the country and has been for most of a decade. Cushman and Wakefield reports shallow-bay vacancy of 4.8 percent in the second quarter of 2026, the lowest of any size band, against 6.9 percent nationally; CBRE's March 2026 brief defines the segment as buildings under 50,000 square feet with clear heights of 14 to 28 feet and reports that its vacancy has run below the overall market since 2017. The reason is supply. CBRE counts nearly half of shallow-bay inventory in major markets as built before 1980, more than 80 percent before 2000 and only 5 percent since 2010, because the economics of building small space have not worked for merchant developers and because land in the infill locations where small tenants want to be has gone to larger buildings, housing and self-storage.

Demand comes from service businesses, trades, last-mile delivery, e-commerce sellers, showrooms, light assembly and the regional suppliers that take 5,000 to 25,000 square feet. It is local, it tracks population and construction activity, and it is diversified across many tenants, which is the segment's main credit strength.

The segment is not one-directional. Cushman reports that shallow-bay vacancy edged higher in the second quarter, and in some metros small-bay vacancy has risen sharply from a very low base as new product delivered into a slower economy. The study tests absorption at the submarket level, with the size band and the quarter stated, rather than assuming the national figure applies.

Small space rents at a premium to large space in the same submarket, and the premium widens for the smallest units. It also costs more. Office finish, more demising walls, more doors, more restrooms, more parking and more site work per rentable square foot put the hard cost of a flex building above that of a warehouse shell; 2026 contractor and design-build quotes put flex and office-warehouse space at $60 to $100 per square foot of hard cost and conventional small-bay shells at $60 to $110, before site work, soft cost and land, against $45 to $75 for a pre-engineered dry storage shell. Coverage is lower, typically 25 to 40 percent of the site, because of parking and truck circulation, which raises land cost per rentable foot. Soft costs and leasing costs are higher per foot because there are more units and more leases.

The study therefore reports rent, cost and net operating income per rentable square foot and per unit, with the following lines built from the comparable set and from local bids rather than from rules of thumb: asking and effective rent by unit size, annual escalations, lease term, tenant improvement allowances and free rent, leasing commissions, management fee, vacancy and credit loss, releasing cost per turnover, and the capital reserve. The development yield that results is compared with the exit cap rate the capital market pays for stabilized multi-tenant industrial product, which in most markets is higher than for single-tenant distribution because of the management burden, and the required rent is set against the submarket's evidence.

The determination usually turns on unit mix. Smaller units earn more per foot and cost more to build and operate; larger units lease faster to better credit and earn less. The study tests two or three mixes and reports which one the submarket's tenant base supports.

Industrial condominiums reverse the question. The developer sells units rather than leasing them, so the study is a sale study: the price per square foot buyers will pay, the absorption of units per quarter, the share pre-sold before construction, the association budget and the developer's profit and return on cost. The buyers are mostly the businesses that will occupy the units, and many of them finance the purchase through SBA 504 or 7(a), which makes the pace of sales depend on SBA lending conditions as well as on demand.

From the buyer's side, an SBA loan on a flex unit follows the owner-user rules on the SBA warehouse feasibility study page, and a borrower that buys a 20,000 square foot small-bay building, occupies 11,000 square feet and leases the rest to four tenants meets the occupancy test; the study tests the third-party space against submarket rent and absorption and treats the income conservatively.

A bank financing a speculative flex park tests lease-up and debt yield. The construction loan is sized within the OCC's supervisory loan-to-value limit of 80 percent for construction and in practice lower, with recourse and usually a pre-leasing or pre-sale condition for a merchant developer. The study projects absorption by unit from the submarket's history, the rent and concessions from the comparable set, and the month at which net operating income covers the permanent loan at the lender's floor.

An SBA 504 or 7(a) lender financing an owner-user's flex building tests occupancy, equity, the job standard and the operating company's debt service coverage ratio (DSCR) after rent, and treats any third-party income at market rent with vacancy. The structure and a worked capital stack are on the SBA warehouse page.

A USDA Business and Industry lender in a rural area may guarantee either an owner-occupied flex building or a building constructed for lease to industrial businesses, since 7 CFR 5001.105(b)(12) lists facilities for lease to private businesses engaged in commercial or industrial operations as an eligible use. For a guaranteed loan of more than $1 million to a new business the Agency requires an independent feasibility study, and in a rural town with no modern small-bay space the study's demand section is often a survey of the businesses now operating from garages, barns and obsolete buildings. The USDA feasibility study page covers the program.

The SBA eligibility and underwriting tests applied in MMCG's studies are those of SBA SOP 50 10 8.1.

The study establishes the site, zoning and entitlements, with the use table row for the proposed uses, parking and loading rules, outdoor storage rules and buffers, since contractor tenants with vehicles and materials often need outdoor storage the district does not allow. It programs the building and the unit mix, reviews the design against the competitive set, and runs the environmental screen. It measures the market area's inventory, vacancy, absorption and rent by unit size, inventories competitive supply under construction and planned, identifies the tenant base by business type, and reports lease terms, escalations, allowances and concessions from the comparable set. It builds the cost table from local bids and permit valuations, sets the capital stack for the proposed program, projects lease-up by unit and the operating statement through stabilization with turnover costs and reserves, and reports DSCR, debt yield and break-even occupancy at the lender's floors with sensitivities to rent, absorption, cost and interest rate. For a condominium project it replaces the lease-up with a sales schedule, a price study and an association budget. It states its conclusion as feasible, feasible with conditions, or not feasible, with each condition expressed as a number.

An MMCG flex space feasibility study is delivered in 9 to 16 business days from engagement and receipt of the project file, with rush delivery from 5 business days. Fees begin at $4,900 for a single-building owner-user flex study under SBA 7(a) or 504; speculative parks, condominium projects and multi-phase developments are quoted on scope. Payment is 50 percent at engagement and 50 percent at delivery. MMCG accepts no referral fees, contingent fees or financing arrangements, and revisions required by the lender, CDC or Agency are made at no additional cost under MMCG's contractual acceptance commitment.

Industrial Case Study 4 applies this method to a contractor's SBA 504 purchase of a 16-unit, 94 percent leased flex park in Oklahoma City: not feasible as proposed, feasible as restructured with the contractor in eight units at market flex rent.