Episode 267: The Asset Class Next Door: Is Small Bay Flex the New Self-Storage?

Announcer (00:03):

This is the Self Storage Podcast with the original self-storage expert, Scott Meyers.

Scott Meyers (00:13):

Hello everyone and welcome back to the Self-Storage Podcast. I am your host, Scott Meyers. And today we have Cody Payne, who is a good friend of mine who’s also in the storage business, but a little different side of the industrial business. He works in the flex parks and the small bay flexible spaces. And so if you’re not familiar with that, well, I brought in my friend Cody to talk about it. Cody, welcome to the show.

Cody Payne (00:35):

Hey man, appreciate you having me.

Scott Meyers (00:36):

Well, good to see you again. We just spent a little bit of time together in Las Vegas at the Inside Self-Storage Trade Show. Always good to get back together with some of the folks that we see well once a year. And then also meet some new friends. And you and I have been going well back and forth and chatting before we actually had a chance to get together and meet in person, which is great to do. But also the reason why I wanted to share a little bit more of what Cody Payne is doing with a Small Bay Flexspace to the rest of Storage Nation here on the podcast. So give us a little bit of background. Tell me how you started in business and then how you gravitated towards this small bay flex space, which is absolutely on fire right now.

Cody Payne (01:14):

Yeah, no. And I’ll tell you what’s crazy. So I started in 2005 and it was not … I mean, it’s been an asset class forever, but it wasn’t popular.

(01:23):

And so when I got started, I was working for a small local firm and pretty much the broker at the time was like, “Hey, go lease the office warehouse stuff. It’s smaller tenant base, but you can do a lot more leases. So you can make a little bit more consistent money instead of just hunting larger fish on the leasing side.” So I was a leasing agent for about the first 10 years of my career leasing and then started to sell some of the office warehouses and then just converted to investment sales and grew a really nice team here. We’ve been together for a long time and we’ve got great investment sale agents and leasing guys. And a lot of these guys also that work for me come from a similar background where they leased it and then sell it. So they kind of know it all front to back.

(02:09):

And that’s very important to me as far as being a specialist. But yeah, started about 20 years ago and still going strong. And as you know, like you said, the asset class continues to grow in popularity and it’s got a lot of eyes on it, especially from the storage world.

Scott Meyers (02:27):

Well, it may be very similar. We’re renting out air. We don’t like habitational real estate or as we call it around here, we like to rent out real estate free of tenants, toilets, and trash. And this is just another avenue or another way above being able to do so, even though there may be a mixture. But if we could, we’ve seen it. You’re right. It is not a new asset class, but it does have different connotations and different definitions. So you’re the master, you’re the specialist. What is the true definition, if you will, of small bay flex or a flex space?

Cody Payne (03:03):

Yeah. So everybody sometimes will use a different term, right? Flex space, small bay industrial, contractor garages. At the end of the day, it’s all the same product. It just kind of depends on when you started and kind of what era. And so what makes it up is, I believe units anywhere from a thousand to 5,000 square feet tenant sizes. Once you start going over that threshold, which some of these parks will have larger, because some people will knock down walls to slowly expand into more and more space, but traditionally it’s going to be 1,000 to 5,000 square foot tenants. And when you start going over that, you start having 10, 15, 20,000 square foot, you start getting into the mid-bay size and a little bit larger tenants. But a lot of the tenants that make up these small bay are going to be your trades, your contractors, your plumbers, electricians.

(03:52):

It’s expanded quite a bit since COVID. So you’ve got lighter retail guys in there, showroom guys, gyms, fitness studios, things of that nature. So their tenant base has really expanded quite a bit, which I think has been one of the bigger things that’s really helped this asset class move into the next level because when I got started, it was only tradesmen that were in there. You were only dealing with plumbers and electricians and things of that nature. And now that tenant pool has expanded drastically.

Scott Meyers (04:19):

So we saw, I had a large industrial building that was located in downtown Indianapolis, and this was going way back to 2008, to the Great Recession. And during that time, we had a lot of small bay flex spaces in this building. It was an old A&P Grocery Depot is what it was. And so the building had been chopped up over the years and turned into a small business incubators with offices on the top floor. The second floor was vacant when we bought it. And then the ground floor had two large warehouses, each roughly 20,000 square foot, and then a whole bunch of space right off of the dock where they put up drywall partitions or cyclone fencing and then created some offices in some of these places or just smaller warehouses. And they were in that 4,000, 6,000, maybe even 10,000 square foot. And what we noticed is right as we come out of, or actually as we headed into that recession, the world stopped, it seemed like at that time, but many big businesses were laying off, the tradesmen and the contractors.

(05:17):

And so there was still work to be done and people weren’t buying houses, but they were remodeling houses. And so they were hanging a shingle out front, buying a truck or taking their truck on their tools and starting their own businesses. And so then we had an influx of folks that were looking for that anywhere from four or 5,000 to 10,000 square foot. And so we started putting different walls up and adding to those spaces. And I think if I had to guess, but you’re on the inside of it, that’s kind of what we’re seeing in this economy that’s been a bit slow. The housing market has slowed with people buying new houses that some people are remodeling or doing different things. But if the economy has slowed, some of these folks are being laid off, the tradesmen from the larger corporations, but still in the business, still business to be had out there and they’re starting their own.

(06:03):

Is that a portion? Is that a percentage of what we’re seeing or what is really driving the demand? You talked about who’s in them, but what’s driving the demand for them now all of a sudden?

Cody Payne (06:14):

So one of your best demand drivers is going to be new home construction, right? Anytime there’s new home construction area, that’s going to bring in more of these guys. What’s also helped it is when COVID hit, all these e-commerce tenants started being created. So it’s not uncommon to go to one of these small bay warehouses and see a 2,000 square foot unit of somebody that is some type of Amazon shipper or some type of shipper somewhere. So you’ve got that influx of tenants. You also have a lot of people with technology, social media and marketing. I’ll give you a prime example. We sold a park recently that had a high-end kind of cheesecake dessert tenant in there. And when I was talking to them, they actually came from a retail center. They just said, “We don’t need the retail frontage anymore because all of our marketing’s online and people know us and

Announcer (06:58):

Word of mouth,

Cody Payne (06:59):

Things of that nature.” So you’ve got a lot of that. And so that’s why I’m saying these parks are getting heavily, heavily diversified really across the board, which they weren’t in the past. So now they’ve got all these other types of tenants that they’re stealing from the office sector, the retail sector that is now being captured. And that’s what’s also helping them thrive.

Scott Meyers (07:20):

So you’re familiar with storage, self-storage. Most of the folks that are here on StorageNation aren’t familiar with your side. So give us the comparisons of the way that you see it. It can be pros and cons or just what the difference is between owning self-storage versus owning a FlexPark.

Cody Payne (07:36):

Well, I think one of the first things for a lot of people, the reason that we go to these storage conventions is because a lot of these storage guys, especially our developers, it’s kind of a easier natural progression into another asset class if they’re looking to diversify, but still keep it somewhat simple because 80% of the construction’s metal construction for Flex. And so anybody that’s building metal constructed self-storage facilities, they’ve kind of got a blueprint on how to build it. So they’ve got that part down, right? Some of the marketing’s the same, but a little bit different. Some of the key differences are going to be leasing and management for the most part because in self storage, y’all got all that good automation. So we were walking through that

(08:18):

ISS floor and all these little automation tools and things of that nature are fantastic for storage. They don’t really have that for small bay because one of the differences that people will see is self storage, they have that first initial interaction with the prospect or the customer tenant, whatever you want to call it. Then they send them the unit and then you probably don’t see that person again until they leave, which for small bay, because they are working there, there’s a little bit more interaction. A lot of these buildings have, a lot of the spaces will have an office and a restroom. So sometimes there can be something that goes wrong. And depending on your lease, if it’s tripled in or not, sometimes the landlord’s taking care of it. So you do have a little bit more landlord to tenant interaction on the flex side than you do on the storage.

(09:05):

But for the most part, I’ll tell you, because we are dealing with so many cross-asset investors coming from office, multifamily, retail. And I can tell you self-storage guys have it down the best out of anybody.

Scott Meyers (09:17):

Yeah. The industry certainly has a lot of eyeballs on it, especially from the tech sector. If you look at just the property management software alone, let alone all the other add-ons and the ancillary bells and whistles and things that allow us to be more efficient. That’s really what is driving this. And I think some of that is also forced by the market and the economy. Self-storage is down a bit over the past several years. And so people have to double down on operations and being more efficient and using tech to be able to do that. And of course, every conversation that we have right now utilizes AI in some way, shape or form or fashion to be able to get more efficient. So that is why we’re seeing these improvements and all types of goodies coming out to the marketplace right now.

Cody Payne (10:00):

I was going to say also- Go ahead. I was also going to say, I see that the self-storage weld has jumped on the subscription bandwagon because it seemed like everybody we talked to, there’s a subscription for something. And so it’s very interesting because on our side, I mean, you have management softwares and things of that nature, but not as much as you do on the storage side.

Scott Meyers (10:25):

Yeah. And I think that’s permeating all facets of our culture and business right now. Anyways, everybody wants to see and to be able to have consistent cash flow coming into their business no matter what type of product it is or service that they’re offering right now, subscription seems to be the way to go. And we kind of have a subscription in the business model anyways in storage for our clients. They pay monthly. Oh yeah, that’s why I said it’s perfect. First on a regular basis. It is. It is. It’s just natural fit. So let’s talk a little bit about the day-to-day operations and you can share … Yeah, please share a little bit about your properties and what your portfolio looks like as much as you feel comfortable with, but what does it look like? You call it a day in the life or as you got into the business, what does it look like to be an owner-operator in these flex spaces and running these parks?

Cody Payne (11:17):

Well, and I’ll tell you, so we have done syndications. I mean, our main business is obviously the investment sale of small band industrial.That’s what we do. We do side analysis, market feasibility, studies, and investment sales. We do invest in parks as well.

(11:30):

We’ve got a great leasing staff here. We don’t manage anything here, but if you are running it, I mean, you’re typically dealing with a tenant base of one to 2,000 square foot tenants, depending on your park size, 40, 75,000 square feet. I mean, you could have 20, 30 tenants in there very easily. And so the best thing about the Flex side is a lot of these have been converting because they weren’t when I first got in the business. A lot of them are now closer to triple net leases. And that’s actually something that I think is a very strong point when it comes to Flex and self-storage is having that triple net lease where the tenant helps pay back the common area maintenance, the taxes, the insurance. So it helps take that burden off the landlord a little bit. But then also, depending on that triple net lease, if there’s something wrong with the space, and a lot of times that tenant is responsible for that.

(12:24):

So you’re not receiving

Announcer (12:25):

That

Cody Payne (12:25):

Call. So in many projects that we sell, the landlord’s really just responsible for mowing the property, keeping it clean. And other than that, that’s pretty much it. Obviously make sure the roof’s not blowing off and things of that nature. So I believe they are, when you compare it to some other asset classes, I believe that they are quite hands off. You still have that property management component to it, but for owners that are not local, out of state, whatever you want to call it, it’s very easy to get a third party management company in the flex world and even third party leasing company to help take care of that asset and keep them leased. And with the tenant velocity out there right now, a lot of these parks are doing very well and staying very consistent on lease up.

Scott Meyers (13:07):

Well, I would think that that’d be the way to go anyways, especially for, well, being a storage guy coming out of this world and expanding into Flex, we don’t like to absorb those additional variable costs. So if we can have these things separately metered and push those costs as a percentage out to our folks, it’s just from a budgeting standpoint or from an ownership standpoint, we’re going to try to simplify that as much as possible. But even best laid plans don’t always work. What are some of the cons that you’ve seen or maybe even just mistakes that maybe new owners make or the folks that really aren’t paying as close attention to the business and running it the way they should? What are some of the things that you see some of the mistakes folks make?

Cody Payne (13:45):

Some of them are maybe not hiring the right small Bay leasing company if you’re going to hire a third party, right? Sometimes the big dogs out there, the top tier commercial real estate firms, they can look good, but are not the best at small bay leasing. Small Bay leasing is by somebody that’s going to really focus on that and do a lot of those because the only way you can make money in reality being a small Bay leasing agent is to strictly do that and do a lot of it. So when I was doing it, I was doing 60 to 100 leases a year, depending on the year. So you got to do quite a few. As far as mistakes go, really most of the mistakes that we see, anything during ownership is usually a fixable mistake. If you got the wrong

Announcer (14:24):

Leasing

Cody Payne (14:24):

Company, you got a new one. If you got a bad management company, you get a new one. If the property’s maybe suffering from lack of upgrades or looks, you can fix that. Most of the mistakes that we see are going in on the new development side. So when people go in, they think, “Oh, I’ll just put down a metal box and we’re good to go.

(14:44):

” Which I think that’s kind of the appeal of it, but some of the stakes we see is people not building to the area. And what I mean by that is not looking at the area and figuring out what does that area need, right? What size of units does that area need? Some areas need a thousand square foot units, some 1,500, some 2,000. There is a vast difference between those two, and then how they increment in size, because you’re going to have a lot of tenants take multiple spaces. So understanding that and then understanding what amenities can help you out, whether it’s ceiling highs, glass frontage, mezzanine space, rear fenced in storage yards, a freestanding loading dock. There’s always a lot of little things that you can add onto these parks to really help make them thrive and beat out the competition.

Scott Meyers (15:32):

When storage was young, back in the 70s and in early 80s when it was becoming a business, the old adage you’ve probably heard is build it and they will come. And it’s a high demand for storage and it doesn’t matter. You can have a bunch of five by fives. Nobody really gave much thought to location or the unit mix amenities or anything else. And then as we mature and you realize, oh yeah, we can overbuild and we can also build too many five by fives and not have enough larger units as our clients or needs are changing. And then comes a site selection as well. “Oh, we got to be closer to the neighborhoods that’s not going to work to be out in the middle of a farm field or tucked back for self-storage into an industrial zone because it’s more of a retail type of application.

(16:18):

“And now we’re seeing … And so we wouldn’t dare build anything without a feasibility study and having a consultant come in for one. And then number two is the banks require it anyways. But from just what you’re mentioning, Cody, and the reason why you’re doing these studies is it seems like there’s even more variables and there’s more opportunities to really, really mess it up if you don’t get the right unit mix, the right sizes or look at the area for all those things. And I wouldn’t even dream of beginning to look at a project thinking that I knew what to do out there. So that’s also part of what you do, is that correct? Is this

Cody Payne (16:53):

Folks- Yes. So we do market feasibility studies all across the US and Canada. And the good thing about Small Bay and Flex is there are signs of, if you’re looking at a market, there are signs that you can see years out, is this on its way to saturation or not? And I think some signs, maybe storage doesn’t … I don’t know if they have the ability to do it or not, but there’s a few things that we can look at like on market time for lease up, right? How did that look five years ago, four years ago, three years ago? Has that moved up? Has it moved down? How does that look? Is the rental rate trending upward, downward? Is it going flat? So there’s a lot of little things that we can also pin that says, Hey,

(17:36):

Because the other thing you got to keep in mind is not all flex is created equal is to where storage, and this is just my opinion, but if you’re in storage and you’ve got a bunch of 10 by 10s, 10 by 10s over here at this storage facility are looked at very similar to the 10 by 10s at this facility. And sometimes that user’s like, okay, who’s cheaper and who can I get it done with the easiest? On the small bay side, it’s a little bit different because you can add those amenities, you can change up those square footages and things of that nature to help kind of accommodate that tenant. So you can go into a market that’s got a lot of small bay on it and build something that nobody else has very easily.

Scott Meyers (18:15):

Yeah. So what would you say is the secret to success or what does the most successful site look like in terms of location car counts, the demographics, what would you deem to be an ideal site in order to build a park on?

Cody Payne (18:31):

Well, you don’t have to be on main on main, which

(18:34):

It always helps if you are. So that’s the driving factor I think for any asset class. It always helps if you are. You don’t have to be, but what you want to do is you want to look at the business metrics of the area, you want to see kind of that business count, how many tradesmen are out there. You want to kind of tailor to that. And if you go, okay, this is a heavy contractor base area with two to three employees, you’re probably going to be around 1500 square foot units. And it probably would be ideal to add a thousand square foot yard space fenced in yard on the back of that unit to where they now have that plus their unit and you’re going to get a much higher rate than anybody else that just has a basic 1500 square foot unit. There’s a lot there.

(19:13):

There’s a lot of little grading and amenity checklists and things like that because another thing that people also sometimes will run into is they’ll do too much finish out, Scott. And we see that all the time where a tenant’s like, “I need two or three more offices.” Sometimes it makes sense not to do that because then you can have a unit that once they leave, nobody else wants.

Scott Meyers (19:37):

Too customized.

Cody Payne (19:39):

Now you’re dropping those TIs. So that’s why we always recommend you’re keeping your tenant improvement of the warehouse total, keeping it under 10% if you can.

Scott Meyers (19:47):

Yeah. Yeah.

Cody Payne (19:49):

Because we run into a lot of high finished warehouses.

Scott Meyers (19:53):

Oh, I would imagine so. I imagine so. Sometimes people can’t stop themselves. They want to turn it into a personal man cave when they should have just stuck to the business basics on it, but I can see where people can go that direction. So give us a glimpse into, call it the near future of the next one to two years. What are you seeing in this space? Is there an insatiable demand for it? Is it driven by market conditions? If you got out your crystal ball, where do you see this asset class going?

Cody Payne (20:22):

I think it still has a long way to go because you still have a lot of markets that have good, solid growth, right? Like Arkansas, Florida, Georgia, Tennessee, Texas, they’re still getting a lot of new home construction. These run really well off of home construction. Now on the flip side, you do have markets that are maybe seeing some oversaturation. There’s parts of Colorado that are struggling on the flex side because there’s just so much being built out there. So it’s like any asset class, you want to be very market specific. You don’t want to take overall market conditions and dynamic. You want to really pin it into that submarket. But I think it’s got a very bright future because also what we’re seeing is we’re seeing more institutions put an eye on it, which is very similar to self-storage. As you would probably know, 25, 30 years ago, before that, it was mostly mom and pop owners, which this is how this was for a long time.

(21:11):

And now you do have institutions that are buying. They’re very specific on what they’re buying. They’re buying mostly infill tilt wall, but those parameters are getting expanded. So I think you still have a tremendous amount of opportunity to still get in before those guys take over.

Scott Meyers (21:26):

It doesn’t matter what the business is, and this isn’t too far of a deviation away from self-storage. And that’s what we’ve been seeing is just you scale the business up, you roll it up and then sell off the portfolio to the next bigger player and they do the same thing or when you get to the REIT level, then they just begin trading assets back and forth. And I can see that the place of a maturity coming to this market as well, and it’s just a good business model. But for many of the folks here and the folks that we teach in our academy and the groups that are in our mastermind, that is maybe not the long-term goal for all of them, but many of them are looking to do just that. They’re buying and building individual facilities in a geographic area, growing a portfolio in hopes to eventually exit.

(22:11):

And sometimes it’s within a fund and syndicating and raising capital, as you mentioned. And other times that’s just for their own purposes or for the ultimate exit 20 years from now to be able to have good quality, like- kind projects that they’ll put out to the market in a portfolio to sell to a larger player. But in order to do that, we have to have financing available for it on the front end. And what we found in storage many times is that there’s still some banks out there that either aren’t comfortable with it because they haven’t done it or don’t have experience or for whatever reason they’ve heard or may not like it, all lenders have different appetites. What are you finding with flex parks or just individual buildings that people may be converting or turning it into this a flex space? Are banks, are they familiar with it by and large?

(22:55):

Are you having to educate them or how is the financing looking?

Cody Payne (22:58):

We do educate quite a bit. Our market feasibility studies help out a lot with that. A lot of lenders reach out to us for those. So those can help out quite a bit, but I will tell you, lenders are very friendly to this asset class and probably because it holds a little bit more finish out than maybe a standard storage facility and you’re banking on businesses more than individuals. And so as far as financing goes, we don’t have any financing issues whatsoever. We don’t have the friendly SBA loan programs that y’all have with the Carlton Sheets low money down kind of style, so it’s a little more conventional financing on this end.

Scott Meyers (23:38):

Yeah. Yeah. Well, as long as we get … It’s easier to get to a yes, that’s all we really care about at the end of the day is to get our projects moving forward. All right. So Cody, you’re providing support within a community of folks that are looking to get into this business by way of Flex Parks USA. Tell us a little bit more about what those resources are for folks and how they can take advantage of it.

Cody Payne (23:58):

Yeah, absolutely. So we specialize in the market feasibility. So if anybody’s looking at a site, not sure if it works, we can help take a look at that, get them moving down the road or moving on to the next project. We’re also big on investment sales, so we sell industrial parks all across the US. And then we have a great book out, Flex-Based Domination. Anybody that is looking to get into the world and just needs a little bit of knowledge and terminology, that’s going to be a great thing for anybody. And then we do go around and go to various events and speak at several events as well across the US.

Scott Meyers (24:30):

Well, we’re happy to announce that you and/or your team is going to be at the Commercial Storage Summit coming up in Orlando in June to do a little deeper dive into what Flexparks look like, but then also to move forward. So just beyond the book and beyond the feasibility. And so looking forward to having you out for that and teaching some of the folks within our community and the greater community that we’re, as we’re showcasing and highlighting the various ways to make money in commercial storage, FlexParks being on one of those, we’re looking forward to having you there. It’s

Cody Payne (24:59):

Going to be a great segment.

Scott Meyers (25:01):

Yeah. Yeah. Looking forward to it. All right. Cody, in the meantime, how do people get in touch with you?

Cody Payne (25:06):

Easy. Flexparksusa.com. It’s where you go. We got everything you need there. A lot of good knowledge stuff, listings, intel, market updates, everything you need to know on the small bay side, we’ll get you covered.

Scott Meyers (25:19):

Awesome. Awesome. All right, Cody. So as we wrap up here, very successful in the business, starting early on, 20 years in the business, similar to myself in storage as well. Tell us what are the best pieces of advice you received either along the way or early on in your journey into FlexParks?

Cody Payne (25:37):

I mean, tell you, there’s a lot of good advice that I’ve received from mentors, my father and my grandfather. I was actually preaching to the guys earlier, and it may sound bad, but getting weird of the time wasters is the biggest thing that can help you out. But also staying patient, I’ve always been a very impatient individual, and so staying patient, letting the process work out is key. And then just always branding yourself. Those things are stuff that we deal a lot in over here. Yeah.

Scott Meyers (26:11):

Good stuff. Well, there’s no such thing as a self-made man, and we are the product of the other folks that have come along the way and standing on the shoulders of those folks. And so I’m thankful for the mentors I’ve had in my life as well. It sounds like you’ve got some good ones as well.

Cody Payne (26:24):

Oh yeah. No, I’ve had a lot of good people in my life, so it’s been good.

Scott Meyers (26:27):

Awesome. Well, Cody, thanks for spending time with us today. Looking so forward to hearing up more and doing a deeper dive in Orlando in June. We’ll put all of your information and ways for people to be able to contact you as well as for the event in the show notes. And we’re looking forward to catching you on another episode with the follow-up in the very near future.

Cody Payne (26:45):

Awesome. Appreciate it, Scott. Thanks for having me.

Scott Meyers (26:47):

All right. Thanks, Cody. We’ll talk to you soon.

Announcer (26:51):

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