What I've Learned About "Man Cave" Warehouse/Office Building Developments as an Investment

Construction & Development
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I've spent the past week investigating a few commercial lots for the purpose of building a multi-unit "man cave" commercial office/warehouse building.

I had heard of these types of properties before, but the concept started to crystalize in my mind after bouncing around some long-term buy-and-hold ideas with @justinsliva and seeing some solid examples in action from some folks in the Storage Rebellion Facebook Group.

The idea is to construct a shell of a building (kind of like a super-fancy storage building, with larger, taller, wider units), with each unit wired for electric and possibly plumbing, and a nicer front façade - so it looks more like a place where people could actually work all day. Some typical unit sizes are 20x50 or 26x60 (big enough to fit a full size RV and possibly a second vehicle or an office)... but they can be larger.

The construction of these buildings can resemble a pole barn or an RV/boat storage building, but with the front "jazzed up" a bit, so they look like a place where people could actually work.

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This is a very basic example from Reaves Buildings... they can be a lot fancier than this if you want to spend the money.

On the inside, they can be just a bare room, or they can be finished out (preferably, at the tenant's expense) to look pretty awesome.

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You can see a lot of other cool examples in this article from the Houston Chronicle, on this website, this website and this website.

There are several companies that specialize in designing and building these types of structures. You can also hire a local builder to do it for you (however, if you can find a company that specializes in this type of thing, it's usually less expensive because they have better efficiencies and they know tricks of the trade from doing a lot of these projects). A few of the companies I've found who do this are:

Some of these companies will literally do everything in the process (design, manufacture and all general contracting). Others will only do part of it (like design and manufacture) and then ship the package to your location, where you'll have to work with one of their local designated contractors to do the rest of the construction.

In my research, I found that in the markets where I'm considering building these (I've looked in Michigan in Illinois), it's difficult to generate enough cash flow to cover the cost of debt service and holding costs. There is actually PLENTY of demand for them... but the market rent for this type of unit is about half of what it needs to be in order to generate sufficient cash flow.

The cost to build them (just the shell and basic utilities) has been no less than $45 per square foot, and more like $60 - $75 per square foot (not including the land, parking lot and other soft costs), and the market rent has been around $7-$8 per square foot. With those numbers, it might be justifiable as an owner-occupied property (i.e. - if you actually need this for your business), but if I'd be doing this purely as a buy-and-hold investment to earn cash flow... there wouldn't be much cash flow to speak of after the debt service and other holding costs.

However, I've heard from others who have been able to get the construction done cheaper if they partner with the builder, or if they're able to get a steal of a deal on the land (which I was actually able to do for one commercial lot in Illinois), making it much easier to justify the cost of construction. So if you can get higher rents (California and Texas are two places that come to mind) or build it for much cheaper, it can make sense... but in the markets where I've been looking at doing this, the high cost of construction and the lower rent price would make it a breakeven deal at best.

Keep in mind, you can build these units to be very "basic" in nature (literally, just a metal shell) or you can make them very nice. Sometimes they're designed with bathrooms in each individual unit, sometimes the whole building just includes one "community bathroom" that all tenants have access to, and sometimes there will be no bathrooms at all. The decision to add bathrooms is significant, especially in the northern states where it gets below freezing, because when you start putting plumbing in each unit, you're obligating the tenants (or yourself) to keep those bathrooms heated throughout the winter, so the pipes don't freeze. This can add significant costs. If you build one community bathroom, you can heat only that single bathroom and not every unit... which can be a happy medium.

On the same coin, of course, if you don't include any bathrooms, you can't charge as much in rent, and there might not be the same demand in the market for units without access to a bathroom... so you have to weight the cost to benefit.

Anyway... I've learned a lot so far in the homework I've done to date (namely, I've learned what isn't going to work in my market, what the typical construction costs are, what companies are known for building these things, and a lot more I haven't even mentioned here). If I keeping moving along in this journey, I'll be sure to post any significant new lessons here.

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@retipsterseth That's awesome info, and very interesting, for me, to hear about these types of commercial/light industrial properties from the owner/developer side. I am not at all surprised to hear that you've found there to be good demand for these types of properties, because I can tell you that in my "day job" we rent spaces like this in various places all around the country, ranging from probably 1,000 to 5,000 SF typically (with the larger square footage spaces often just consisting of 2 or more adjoining units like this being combined for a single tenant), and it can be very hard to find these properties in many markets. Often, commercial spaces for rent are either these massive 100,000+ SF single unit spaces, or more professional (doctor, lawyer, etc.) or retail oriented spaces that are more expensive to rent and lack a decent sized unfinished area with a roll-up door. A co-worker and I were just commenting yesterday on how frustrating one of our landlords has been to work with, but there just don't appear to be any other decent options available in that particular market for a comparable property.

That said, I know in some markets, where the supply-demand balance is in the landlord's favor, you can potentially get over $12/SF plus Triple Net operating costs borne by the tenant, but in my experience that would generally require some basic build-out of a finished space within the unit, as well, in addition to the warehouse space -- like a small reception area, an office or two, maybe a small conference room, just taking up maybe 40% to 60% of the unit, with the rest unfinished warehouse space. In temperate climates, I've not necessarily found HVAC within the unfinished space to even be expected.

Edited to add: In the markets where I have experience as a tenant of this type of unit, minimum lease terms of 3 years has been very common over the past 8+ years (there was more flexibility at the depths of the last recession), and if you were to offer some interior build-out to the initial tenant's specs (start with the shell, until someone is ready to sign a long-term lease), you could cap the amount of "allowance" that you would give for that build-out, and possibly require a lease term even longer than 3 years in some markets. If someone wanted to do some crazy unique build-out, or a subsequent tenant wanted to make changes to a perfectly good partially finished unit, you could probably make them pay for all of those costs, again market-condition-dependent. Of course, you could just make all tenants pay for their own build-out no matter what (even the initial tenent), but then I would expect rent to be in that $6 to $8 per SF range in most markets I've seen.

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@retipsterseth you might be able to build them cheaper if you go with a pre-engineered metal building from a company like Big Buildings Direct. They've got all kinds of options. Although they seem to be very basic.

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This might not be able to fetch the highest rent amount, since they wouldn't be insulated or have anything special built into them, but you could at least get them constructed for a cheaper price.

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@dl7573 thanks for the feedback, that's really helpful! It sounds like this kind of thing would make a lot of sense in the markets where you've looked.

The funny thing is, I'm not able to find any comps in one of the areas where I'm considering this... there is literally nothing like it on the market right now, so my estimated rent per square foot is basically a guess from the brokers I've talked to. In a way, I'd almost be "creating the market" for this type of space, since it doesn't seem to exist, which seems like a risk, but could also have a big upside if I end up being right. I wonder what's the most sensible way to figure out what each unit would rent for when are no similar comparables in the area. Seems like a similar dilemma to pricing land when there are no clear comparisons around.

And thanks for the link @seanjean - those buildings do look a bit more basic than what I was thinking, but it's hard to argue with that price. That kind of thing looks like it could work well in a rural area, but the market I'm looking at is a bit more densely populated... doesn't quite seem to fit. I should do some searching for other pre-fab metal building manufacturers. Maybe there's another cookie-cutter building out there that would more closely fit the dimensions and visual aesthetic I'm going for.

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@retipsterseth I'm sure you've probably checked here already, but if nothing else, for others who may see this thread in the future, as a consumer of these types of properties, I've generally done my research in the past by searching on Loopnet, For Lease, Type of Property: Flex Space. There's a lot of variance within that "Flex Space" class, but in my experience it generally seems to come the closest, and most consistently, to the type of property that I think you've described in this post, i.e. multi-unit, relatively small space, pre-fab or kit type metal buildings, with varying degrees of "prettied up" facades for commercial/light-industrial tenants.

Having looked at some current listings in a few different markets around the country after seeing your post here, I think there's a lot of good info for people to glean from Loopnet. For instance, the listings I've looked at today appear to confirm my own lived experiences in that factors with significant impact on pricing generally appear to include:

  • Location - e.g. proximity to interstate access, airports, etc. can drive the rental price up (as well as land cost, I'm sure, unless someone finds a very motivated seller)
  • Quality of Property / Level of Interior Finish Included - Is it an old building that looks kind of crappy? Are they just renting a shell with drywall, or is there some landlord-provided internal office suite build-out baked into the rent?
  • Lease terms - Min. length of lease as well as Triple Net vs. Modified Gross, etc.
  • Parking - It's hard to run a company with multiple employees, or onsite customers, out of a 1,500 SF space if you only get 1 or 2 parking spaces, so if that's all you're giving each tenant, it's going to impact rent prices unless it's just such a hot commercial market that they have no other options.
  • Size of unit - Probably intuitive, but it appears to me (and it's consistent with past experience) that the larger units (4,000 to 6,000 SF) go for less per foot, on average, than the 1,000 to 2,000 SF units. My guess is that, in addition to economies of scale for construction and build-out, this probably has to do with demand, in that there are generally more takers for the smaller units than the large ones. Of course, when you have the vacancies (like when your building is brand new) you can always rent multiple units to one tenant, but doing the reverse (renting a single unit with shared doors and facilities to multiple tenants) is probably not as workable in most cases.
  • Probably put access to reliable internet on this list, too. In the past I think it's been an afterthought for a lot of landlords and tenants, but I suspect would be increasingly less so at this point and moving forward.

Another bit of info I'm seeing on Loopnet that I think people considering this would find helpful, is that I'm seeing several landlords/brokers of these types of spaces including within their listings the names of other tenants at the properties, so it might give people some ideas about who to market to, some of which might surprise people. For instance, in addition to the contractor type businesses you might think of (plumbers, electricians, HVAC, etc.), it looks like a lot of these properties are renting to cross-fit type gyms, small startup churches, etc. That's the kind of thing that makes sense once pointed out, but doesn't immediately come to my mind, at least, when thinking about possible tenants for these properties.

Possibly the most interesting thing, to me, is that almost regardless of which second, third (or fourth) tier market I look at across the country, I generally see pricing falling largely in that spectrum that we mentioned earlier in this thread, from $6 to $12 (occasionally $14 or higher) per foot. As best as I can tell (again, with no actual experience as the owner/landlord) some balance of the factors above seem to drive where on that spectrum a property falls.

I think one more factor you have to add to the list, which goes to your last point as well @retipsterseth, is the amount of competition. Having been in the situation at my day job where we really wanted to find a property just like this in some small market, but none at all seemed to exist, I can tell you anecdotally that lack of local competition is possibly not a bad sign, unless the property's just in the middle of nowhere with very little to no economic activity around.

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Wow, that post was GOLD @dl7573! I wish I could add multiple "likes" to it. :)

Thanks so much sharing all those ideas. They all make total sense, but I hadn't even thought about some of those (like the importance of parking spots and reliable internet). They seem so obvious now that you say it.

It seems like in the area I'm looking, erring on the side of "nicer" would be the way to go, but it still comes back to whether the rent price can be had. That's the million dollar question.

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Along the lines of higher-end vs. lower-end man cave units (whether they're just a metal shell with no utilities, or a much more finished out white box space with all utilities included), I saw someone on Facebook mention this company which seems to have a good design going. With this kind of space, I can see A LOT of potential tenants who would probably pay a higher price to rent these things.

From what you've researched @dl7573 - where does this fall on the spectrum of "best" vs. "worst"? Would you guess this could earn more in the range of $12/sf (or possibly even higher)?

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Thanks @retipsterseth Based just on that video clip, I feel like that's definitely got potential. In terms of the exterior, it looks really good for the back of the building. If it's not too much of a budget-buster, if a brick facade or at least partial brick, a few feet up from the ground, and some big windows, could be done on the the street/front entrance side, that would make it look really good and versatile for a lot of different tenants ranging from some more professional types to contractors, non-profits, you name it.

The interior shots look like a really nice shell. They show a pretty light interior build-out that's really nicely done for what it is. Although, I think a lot of business owners/managers who intend to bring customers to the facility or have multiple employees working there (who might need to go into a closed-door office space sometimes to have a conversation) would probably need more of a finished office feel than what's shown in the video, starting at the front door / ground level.

Assuming a nice looking facade, good location, and healthy supply-demand conditions in the local market, without taking into account any of the other factors mentioned earlier, I would think something like this would easily rent for $9 or $10 or more per ft as shown in the video, and $12 or more with a more finished office space. And like I might have mentioned, I could definitely see doing a build-to-suit approach for the interior with the initial tenants, so you just rough in the plumbing and electrical and stop there until you know what your tenants actually need and are willing to pay for. One might want to pay less in rent and cover their own build-out cost, while another wants you to take care of the interior build-out and is willing to pay you more every month because of that.

Here are a couple of listings on Loopnet (which could theoretically come down at any time), that kind of show what's possible for flex space in a few different markets.

https://www.loopnet.com/Listin... The primary listing photo is an artist's rendering, but if you scroll through, there are photos of the actual building under construction. I'm pretty sure their price is just for the shell, with just a rough-in for the interior, but I could be wrong.

https://www.loopnet.com/Listin...

https://www.loopnet.com/Listin...


I'm sure that the flex space listings I'm seeing with high prices aren't all kit buildings, but it kind of seems like you can make a kit building look like almost anything on the outside these days if you tried hard enough. Slapping brick or stucco on these buildings must add some cost, though, so I don't know what that does to the economics.

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@retipsterseth said:

It seems like in the area I'm looking, erring on the side of "nicer" would be the way to go, but it still comes back to whether the rent price can be had. That's the million dollar question.

Thinking about what you said there, Seth, and totally understanding that no one in their right mind would want to gamble the kind of money involved in something like this, one idea does come to mind, to test the market. You could put up your own test listing on Loopnet, with an artist's rendering of what the building could look like, possibly a floor plan of the overall building, just showing dimensions of individual units, and see what kind of responses it gets at different price levels and lease terms.

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@dl7573 that's a great idea, I hadn't thought of that.

I'm not sure how detailed you were thinking, but when I checked with one builder, they said it would cost anywhere from $1,500 to $6,000 for an architect to put together plans and an artist rendering of what the building would look like (I've never done this kind of project before, so I don't know how reasonable that cost is). Either way... that's a bit of coin just to test the market and see if anyone responds (and even then, they're just artist renderings, not actual pictures).

How much detail do you think would be necessary for something like this, for potential tenants to get a real, accurate feel for what the space would have to offer? I'm assuming it would have to be more than just a drawing on a napkin, but how far is far enough, do you think? Would I need to get hyper-realistic renderings of the proposed building to do this concept justice?

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@retipsterseth Yeah, if I were just testing the market I don't think I'd want to pay $6k to an architect for something that I had no idea if I'd actually proceed with, either. For the purposes of verifying market demand only, maybe you could use representative pictures of buildings and floorplans from already existing sources, such as the actual building manufacturers' websites/brochures (preferably), or failing that, other Loopnet listings, which could come from virtually any other market. People do this sort of thing to test a market for digital products all the time (ebooks, courses, etc.), and in those cases, a lot of the time they actually collect some money, too. If it were me, in this case, as long as I wasn't actually taking money from anyone (for deposits or whatever), I don't see anything wrong with doing something of a "pro forma" listing using pictures from other sources.

If you do go this route, though, for the results to be meaningful, and the listing to be credible, I'd try to find pictures that are as close as reasonably possible to what you'd actually be (potentially) delivering. In other words, if you show a picture of a beautiful brick/stucco facade or outdoor landscaping including palm trees, but in actuality you're planning to go with the painted metal straight from the factory, and are building in Wisconsin, or if you post a floorplan showing 20 units @ 3,000 SF each, while you'd actually build a 6,000 SF building split into six 1,000 SF units...well, I'd be concerned that you're at risk of skewing your results, inaccurately.

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I currently lease out 1500 SQFT for our Medical Equipment Biz. I believe there is a great market for small business for flex space and/or live work units. Business owners prefer to own the building, but often lease since their business takes some much of their time, they don't have time to source and improve land. If you can offer purchase options with debt service that would do better than a lease, this would be a big opportunity. I also looked at investing in Container warehouses to store my overflow from the warehouse. Rehab old run down buildings is even more time consuming. Turn key ownership would be ideal.

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@Michael-Russo great insight, thanks for sharing. Not sure if the margins would make this a profitable niche for me now but I am definately going to log this away as an idea if the opportunity/property appears for me.

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@Michael-Russo interesting idea. What do you think would be sensible buyout terms in this kind of arrangement? I've never even thought about it... so I'm not sure what the typical business owner would expect (or what regulations would apply to it, if any).

It would be nice to have a third exit strategy to have in my back pocket though (1 being a pure lease, 2 being a straight-up sale, 3 being a lease-to-own).

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@retipsterseth A straight up sale with Seller financing or arranged financing for the small biz owner. A lease to own is a good idea too, since the business will take better care of the property. As mentioned if you can make it easier for the small biz to acquire the property is just dollars and cents. I would suspect the lease payment to be higher than any debt service on the property associated with the real estate commercial loan.

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@Michael-Russo Very interesting. I'm wondering, are you envisioning this strictly with single-unit commercial/light-industrial properties, or even multi-unit, flex-space condos, essentially? Seems like the latter could work, too; for instance building out a 6,000 sq ft flex space property consisting of four (4) 1,500 SF units, and then offering potentially any and all of the 3 exit strategies noted in @retipsterseth 's last post, all in the same property, depending on the preferences of the individual tenants/buyers.

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@dl7573I Depending on ones budget and access to financing. Your investment plan would be ideal.

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Office properties have always been considered a perfect choice for inexperienced investors.

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@retipsterseth


Depending on the proximity to water, folks would dry dock their boats (sailboats) in addition to Rv's and cars...

just a thought.

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@elyarp how do you think office space will survive after the pandemic?