Real Estate Underground

Flex Space: The Hidden Gem in Commercial Real Estate with Alec McElhinny

• Ed Mathews • Season 2 • Episode 166

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Speaker 1:

Like a metal building, is like a pre-assembled Lego set, like when you get the package there's directions how to put it up, kind of like a Lego set, and it's not very hard to put up. Honestly, you can find a metal erection crew pretty easily.

Speaker 2:

So the big question is this how do real estate investors who don't have a ton of free time, don't have access to off-market deals and didn't start life on third base, how do we conservatively grow our real estate business to support our families, finally leave the corporate rat race and build a legacy? That is the question. This podcast will give you the answers. I'm Ed Matthews and this is Real Estate Underground. Greetings and salutations, real Estate Undergrounders. It is Ed Matthews with the Real Estate Underground.

Speaker 2:

Thank you so much for joining us again today and making us a part of your day. For those of you out there who are getting value first off, thank you. I'm grateful for all the listeners. I'm grateful for the emails and texts and I love the ideas and the concepts and the other guests that you are suggesting, so keep them coming. Thank you very much for that that you are suggesting, so keep them coming. Thank you very much for that. Also, if you are new to the show and you do get value, I would be very grateful if you follow us, because that helps us grow.

Speaker 2:

So with that, let's get into the show. With me is Alec McElhaney, and he is the CEO of Landplay, one of the reasons that I love having guys like Alec on the show is multifamily. In a lot of markets it's played out, at least for a little while, and so active investors are dry powder on the sidelines looking for other really interesting asset classes, and Alec has a really interesting and thriving company that as soon as we discovered him, we had to have him on the show. Alec, welcome to the show and thank you very much for joining us. For those folks who haven't discovered Lay or you, why don't you tell us a little bit about who you are and what you do for a living?

Speaker 1:

Yeah, my name is Alec McElhaney. I am a FlexSpace developer and I'm doing my first retail and medical office project as well.

Speaker 2:

Okay, cool. Is that the passion project you talked about when we were getting ready to press record?

Speaker 1:

No, it's actually a FlexSpace development, but it's going to be on 35 and I'm going to build the biggest sign on 35. So I'm excited about that.

Speaker 2:

We'll get into that in a few minutes. So let's talk about FlexSpace and why it's an interesting asset class. What drew you to get into that business?

Speaker 1:

Yeah, I was doing industrial value add. Interest rates were coming up. This was a little bit after COVID and it was a little bit harder to buy an asset and stabilize at a higher value as cap rates were coming up. I met Guy at a conference. He was building what was called FlexSpace. I didn't know anything about it and I just looked at the numbers and I'm like, well, this makes a lot of sense and the margins on it are good enough where you don't have to really worry about higher interest rates Okay.

Speaker 2:

All right. So define flex space for me Are we talking about, because it's not quite industrial right and it's not storage right. So how does flex space fit into the marketplace? Flex?

Speaker 1:

space is like a hybrid of warehouse and office space, like light industrial office space and just depending on what the tenant wants we can build them out a little bit more office, but generally we stick to 10% office, 90% warehouse. Generally flex space have smaller bays like 2,000 to 4,000 square feet, but we can move bays around or the mizing walls to have bigger or smaller tenants.

Speaker 2:

And so with regard to the space itself. So you know, when I hear office and garage or warehouse, I think contractor garages, right. So is that a classic use case?

Speaker 1:

That's great. Yeah, exactly, that's a great type of tenant. So down in New Braunfels is where I have one of my projects. Like when you think of like flex spaces, metal warehouses, you think of blue collar, like they're not businesses that are making a lot of money. But one of the tenants down in New Braunfels he makes all the bingo chips in America and he makes millions of dollars each month and he rents out a small space to package his bingo chips. Even though they're smaller type of tenants they could be doing very well. Plumbers and electricians and HVAC guys are doing pretty well right now.

Speaker 2:

They are yeah, and some of the wealthiest guys, some of the guys that have the biggest boats I know are HVAC electricians and plumbers. So there's that which comes in handy because I don't have a boat. I have friends with boats, so it's a lot more fun.

Speaker 1:

I bring the beer and the food and the building. I'm going to make you tell me all about the building and then it's a rental or building as one. But we do condoize the units. You can sell at a higher price per foot. If you do sell it to a condo buyer, it could be an investor or it could be somebody with an SBA loan, like a business, who wants to have their own unit and maybe the unit next door that they rent out and further expand. So it just increases the buyer pool for it.

Speaker 2:

And so of the units that you're developing right now, are there any of them rentals, or are you building them to make them condos and sell yeah?

Speaker 1:

I'll condo-ize it because it's not very expensive to condo-ize. But I would love to sell as condos. But I'm just performing like worst case scenario, like we can only rent it out and we'll just sell the whole thing once it's all done.

Speaker 2:

So what's your hold period on a project like your typical project?

Speaker 1:

So the metal buildings go up pretty quick. Actually, you can have them go up in about three to four months and then site works about two to three months, depending on how big your site is. Three to four months and then SiteWorks about two to three months to be on a bigger site. Months you're operating and as long as you're in a market that needs a space, you can lease it up pretty quick.

Speaker 2:

Yeah, that was one of my other questions. How do you know if a market is right for this kind of building.

Speaker 1:

Yeah, and this is a little trick that I want to give to investors out there. I think a lot of people like you mentioned multifamily. A lot of people see what other developers are doing and hear about these mindset conferences and think that's the thing to do. You want to do the opposite of that. You want to go straight to the source and figure out what the numbers are. So I'll go to a leasing broker and figure out what like actual vacancy is. So, for example, like a office vacancy in Austin, let's say it's around 20%. I probably don't want to be building too much office, but if it's flex space and it's like 2% vacancy, that's a great vacancy. That means I can build something and I could probably lease it up a little bit quicker.

Speaker 2:

Yep, and so when you are. Obviously, adoption and vacancy are huge metrics that are easily attained through a good broker. In terms of the size, the scope, how many units is it? Just hey, we're going to put as many units as that five acres is going to allow, or is it like? What is the thought process in terms of how you're approaching these development engagements for projects?

Speaker 1:

Yeah, that's a great question. So I think the time to maximize a site, to put as much flex space on a site, that time has passed. A lot of markets I'm sure you could find markets where that still works but I see a lot of that product that they can see starting to come up and I see a lot of projects going up like that. So that's a product I don't want to get into. I'm seeing more on a niche type of flex space. Let's say I find a five acre site and I can put 70,000 feet on there. I'd rather put up 40,000 feet and then have a two, three acre outside storage lot. I'll be able to rent it out a lot quicker and get higher rents Okay.

Speaker 2:

And so, when you're looking at the additional 130,000 square feet give or take in terms of that five acre lot, what types of space are you renting? Are you talking about RV storage? Are you talking about materials?

Speaker 1:

It's a great question. A lot of flex space type tenants actually want a little bit of yard too. So that's if you have a guy who's selling bobcats, he wants a spot to put his bobcats outside and he doesn't necessarily need to pay 15 to 18 bucks a foot to leave it inside. He'd rather pay $1.50 a foot outside. So it's people who want outside storage and a lot of flex space tenants like electrical contractors, maybe even HVAC guys. They generally want a little spot outside the source stuff.

Speaker 2:

Yep, okay. And so when you're looking at land, so obviously land play being the name of your company. This is all about identifying the right space, right? What's your process to identify the right space? And I'm curious, from a zoning perspective, what types of lots are you looking for?

Speaker 1:

It starts out with what type of product do you want to build? So if I want to do a flex and outdoor storage for example that's one of the products I like I will first look in a county or city that's really easy to get it approved. So, for example, out here in Austin there's a city called New Braunfels. It takes about a year and a half. Let's say you identified a piece of land and you started site plans that day. It'll take you about a year and a half before you can actually start building it. And if you go like five miles north up to Como County, that will take around two months to get site plan approved and you get similar rents. So it's like why would you build a really difficult municipality when you can build an easy one? So first find areas where it's really easy to build and then after that find what the right zoning is. A civil engineer can be helpful for that, or an architect could be helpful for that. A muni code you can look that up online if you want to do it yourself.

Speaker 2:

And then after that, yeah, those of you out there having been through this a few times, don't do it yourself.

Speaker 1:

Hire a professional and then after that, is your site specifically good for it? Are there any d researches? Are there any masonry requirements? Are there any proffered conditions? There's a lot of things like and that's one of the biggest risks I find with the piece of land are like these little hidden things that you don't really know about the land that might not come up in the title commitment.

Speaker 2:

Yeah, we're talking deed restrictions is usually a big one, but are you talking about environmentals and things like that as well?

Speaker 1:

Like a phase one. I've never had an issue with phase one or environmental issues, but if you're near a gas station or near what is it? Laundromat Tiff yeah, you want to stay away from those. I did look at a site that I wasn't interested in once. That was a garbage disposal site.

Speaker 2:

Come to find out Are you looking for high traffic areas, low traffic areas, do you not care?

Speaker 1:

Yeah, because I want to do like a. I feel like a lot of the flex space is starting to get overbuilt in the low traffic, like out in the industrial park areas. I'm targeting areas with very high traffic that should be a retail site but might not have sewer or might something else with the land where you can't put retail on it necessarily. So it's a great retail site but I can put the flex outdoor storage products.

Speaker 2:

Why wouldn't it be an ideal retail site? You said something about septic.

Speaker 1:

Yeah, the site in New Braunfels or in Como County that I have. That site would be perfect for retail. It would get great rent for retail. But there isn't enough sewer for the site. There's a package plant in the back for housing development that is shared for the entire area so I can tap into that, but I only get like a certain amount of sewer credits. So that's not enough to do area. So I can tap into that, but I only get like a certain amount of sewer credits, yeah, so that's not enough to do retail, which is a little bit more sewer heavy. So I'd have to do a flex project.

Speaker 2:

All right. And so when you're looking at retail, for instance, you're talking potentially like a restaurant or something like I use, Like a strip mall or something. All right. And so when you are, you find a lot, you get the approvals. Are you having an architect design each and every one of plan? It is really helpful if you stick to one size building and just cookie cutter it that does save a lot of money and your architect will love you for that Brain damage, it becomes okay.

Speaker 2:

And the metal building company that you work with local, or are they somebody that you've sourced and are national, international? You flying this stuff in or boating this stuff in from China?

Speaker 1:

Yeah, no. So I would say away from the Chinese metal buildings. And you can find them pretty cheap and I don't know how terrible to back that now, but you can't find them cheap out there. But let's say it's missing a part or a part breaks upon delivery. Yeah, you can take for them to send that back over. And what back and forth process? Is a factory like reputable Find these or will they give it to you free? So I wouldn't get your metal building from there? There's so many things wrong. I can go with the metal building. I'd get that from american company corn. So it's a pretty well reputable company and I have a guy. He's a subsidiary of cornstone and if you order in bulk he can generally get good prices on metal buildings. Okay and just.

Speaker 2:

And just out of curiosity and give me a range. I'm not asking for the missile secrets. What's it cost to build separate from land? Just the actual construction? What's a per square foot number? That is?

Speaker 1:

If you talk to a GC, they'll tell you 120 a foot. If you build it yourself or have a really good GC that does flex space, you can build it for cheaper.

Speaker 2:

Actually, let's talk about rent first and then we can talk about selling. So in the markets you're in, what are you able to rent per foot?

Speaker 1:

It depends on where. If you're in downtown Austin, you might be able to get north of 25 bucks a foot and if you're out in so the county I'm in Como County I would say flex rents are around 14 bucks a foot. If you're not on 35, it's not as big as 95, but it has about half as many cars going up and down it does 95. Up to Connecticut it does. Yep, okay, yeah, crazy. But in Florida, yeah, but yeah, there's around a hundred thousand, 150,000 cars going by every day. I can get up closer to 19, maybe 20 bucks a foot for the front buildings and the ones a little bit behind it. I'll probably get closer to 17 bucks a foot.

Speaker 2:

That's really good. And then when you go to sell, obviously you're selling the whole building right. So what's that look like in terms? Of what are you getting per foot or is it per unit?

Speaker 1:

I don't even know how they're priced, to be honest, yeah, and cause I have a little bit of outside storage, it'll increase the price per building footprint but I'll conservatively perform a 250 a foot for the flex space or for the stuff I'm selling, I think it'll be probably closer to 270 a foot.

Speaker 2:

Now I know why your investors are so happy. Yeah, interesting, yeah, interesting. Okay, I'm curious about the buildings themselves, in terms of maintenance and all that. You're only owning it for two years, probably not a lot breaking, and also there's not a lot of moving parts. We're talking about maybe a bathroom, maybe a kitchenette, and a warehouse.

Speaker 1:

Yeah, it's so much easier to build than a house. A metal building is like a pre-assembled lego set, like when you get the package there's directions how to put it up kind of like a lego set and it's not very hard to put up.

Speaker 2:

honestly, you can find a metal erection crew pretty easily do you ever thought about doing it, bringing that in-house or is it just easier to outsource it to another company?

Speaker 1:

I feel like it's I could probably do it in-house, but I don't think I'm doing like I would need projects going like all the time and maybe if I started a company where I was GCing for other people then I would probably think about that. But I feel you can find a lot of subs. You do it for a great price, even a lot cheaper than what GCs will quote you.

Speaker 2:

All right, hey, so we're about 20 minutes into the conversation. Why don't we move on to the lightning round and then the final five and then we'll land this plane? All right, Cool. So I'm always interested in. Obviously you're doing very well. I would assume the bills are being paid and the mortgage is taken care of. If you have kids, the college is probably well on its way to being taken care of, Cars are paid off all the good stuff.

Speaker 1:

And yet you still get up and go to work on Monday morning. So what gets you out of bed? What is that thing that drives you? I met a couple mentors right out of college who had phenomenal companies. They were making a ton of money and they were so young. They're younger guys in their early 30s. It was just so inspiring to see that people do that. There's a quote. I really you're the uncontested author of your life. I really feel that if I write something down, if I say it enough, if I start moving in that direction, I can make anything happen, and I want other people to feel that. I want other people to feel like anything's possible, because it is yeah.

Speaker 2:

Because it is In order to get where you want to go, you need help, right? This is a team sport, and so I'm curious about the mentors in your life over the years, and, specifically, I'm curious about the best advice you ever got and who gave it to you.

Speaker 1:

That's a great question. The best advice I ever got was bigger is not harder, it's just bigger. I don't remember who gave that to me Right when I heard that I'm like that is so true Doing right. When I heard that I'm like that is so true doing a 10,000 square foot flex space development, I'm probably doing 250,000 this year. It's probably gonna be easier for me to do 250,000 than that 10,000 the first time, like 20 square feet yeah, square feet. So it's not harder, it's just bigger. That's all it is, that's also. I heard that entrepreneurs are really good at tricking themselves, that things are easy and then they jump in and just figure it out. So it's a great.

Speaker 2:

Really Okay. When you've burned the boats and the water is right at your eyeballs, you tend to figure it out Exactly All right, and so I also think that thank God for mentors, but also thank God for mistakes. Fundamentally believe we learn more from our mistakes than from our successes, and so I'm curious about a decision you'd love to have back over the years. What was it and how did you think it through and how'd you recover if you were able to?

Speaker 1:

Yeah, I'll go with this one. The first investment property I bought, I think I was 23 or right out of college. I bought a duplex right when COVID happened. I overpaid it for it. I paid like 5K over what I probably should have paid for it.

Speaker 1:

I mentioned this mistake for two reasons. The first reason is you have to really know what you're doing. A lot of risk in real estate is not knowing what you're doing. If you actually know what you're doing, it could be less risky than a nine to five job. The second lesson from this is it's okay to make mistakes and it's going to be fine, and especially with real estate, just hold it a little bit longer. So with this property, I just wanted to get into something. Like I was just so tired of sitting in my butt like watching people be successful on YouTube and I wasn't I bought it and I just had to hold it a little bit longer and after the debt was being paid down, after prices kept going up, like I still made a profit when I sold it. Time does heal, that's for sure. Yeah, it's good to make mistakes. Go make mistakes, do it.

Speaker 2:

Now it's the. Somebody once told me you can't make an omelet without breaking eggs. So yes and sure, you're constantly taking in information in terms of books or podcasts, or however you do that. So I'm curious what is the way that you learn, like, how do you? What are the tools that you learn? Do you read books, do you watch podcasts? Do you listen to or watch YouTube, and, specifically, what authors or creators are you paying attention to these days?

Speaker 1:

Yeah, I just want to encourage a lot of investors and entrepreneurs who are listening to this. I think a lot of us didn't do well in school because we were kinesthetic learners. We learned by doing. If I don't know how stormwater management works, go talk to a civil engineer, and that is the best way to learn. That's way better than YouTubing things. Go in person, go talk with them and take action on it. That is the best way to learn, in my opinion, and a lot of the real-time information.

Speaker 1:

It's going to be a while before that's uploaded and made like very popular information. Like when was the best time to get a multifamily? Probably 2015, and it probably wasn't very easy to find on the internet. Multifamily was something you get into the way to know. That was like actually talk to brokers and see what the demand was. Yep, right on For good resources. I think I actually really like chat, tpt, cloud, like any of the AI tools, because it might not be accurate information, but it gets you the context to know the right question to ask when you get to the place to ask those questions.

Speaker 2:

Gets you 80 plus percent of the way there.

Speaker 1:

right, you still got to dig deep, but what friend do you know who knows who's 80% right? That's great, those are great odds.

Speaker 2:

I'm married, so I'm never 80%, but, and that just means that my wife is very smart. That's it. The last thing I'm curious about is how you define success in your own life. What does that mean to you?

Speaker 1:

Yeah, if I think we all had a taste of being really successful when we were kids, when we woke up very excited about the day that we could create anything and we could imagine anything and believe anything was real. And I believe going back to that version of yourself who's a kid, who can believe anything is possible and actually make it happen, like that's what excites me.

Speaker 2:

I love that. All right, my friend. I've really enjoyed this conversation. Congratulations on one hell of a business that you've built. When you're not talking about FlexSpace or anything real estate related, what do you like to do for fun?

Speaker 1:

I don't really have a lot of fun outside of. I work out a lot. I'm getting into eating healthy yeah, working out, but I like what I do and I also love vision. I love mindset, I love imagining the future, I love learning about new businesses. That's what really excites me Awesome.

Speaker 2:

So if people want to learn more about you or one of your projects, what's the best way to get in touch with you?

Speaker 1:

Yeah, lamplaycom, and it's landplaycom. Or on LinkedIn. If you Google Alec McElhinney or Lamplay, just shoot me a message.

Speaker 2:

Would love to connect with you, great Alec, mcelhinney or LandPlay, just shoot me a message. Would love to connect with you, great Alec. Once again, congratulations on an awesome business. Thank you for letting me pepper you with all those geeky questions and look forward to seeing your business continue to explode. Congrats, thank you. This has been the Real Estate Underground. Don't forget to rate, review and subscribe. It helps us grow. Until next time, undergrounders, remember your real estate journey begins with a simple step forward. Now get to it. Bye for now.

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Ed Mathews - Clark St Capital

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