Most flex space pro formas are built on optimistic assumptions that collapse the moment vacancy lingers or a tenant churns. Here is the actual math — and an interactive calculator so you can stress-test your own numbers before committing capital.
A contractor garage that pencils on paper can still underperform badly in the field. The difference is almost always in the assumptions: vacancy rates that are too optimistic, operating expenses that are too low, and build costs that balloon past budget. Before you sign on land or pull a permit, you need to run a real pro forma — not a hopeful spreadsheet. This article walks through the mechanics of flex space ROI, then gives you an interactive calculator to test your own project.
<\!-- SECTION 1 -->Contractor garage investment returns come down to four variables. Everything else is a function of these:
Get these four numbers right and the rest of the pro forma is arithmetic. Get them wrong — particularly the development cost and vacancy rate — and you will be explaining to partners why year-three cash flow looks nothing like the deck you sent in year one.
A reliable flex industrial development ROI model has four layers. Build them in order and you will catch most of the errors that sink deals in due diligence.
Start with gross potential rent. Multiply the number of bays by the market rent per bay per month, then annualize it. This is your ceiling. Now apply a vacancy factor to get effective gross income (EGI). Do not use an optimistic vacancy number here — use 15% minimum for a stabilized pro forma, and model a separate lease-up scenario at 25–30% for the first 18 months. Deals fail because developers model stabilized occupancy from day one.
Deduct operating costs from EGI to get net operating income (NOI). For a simple contractor garage, operating expenses typically include: property taxes (0.8–1.5% of assessed value annually), insurance (0.3–0.6% of replacement cost), maintenance and repairs (2–5% of EGI), property management if third-party (8–10% of EGI), and a capital reserve (3–5% of EGI). Sum these up — you will typically land at 22–30% of EGI depending on your market and management structure.
Return on cost is NOI divided by total development cost. This is the most important number in your initial underwriting. If your return on cost is below the prevailing cap rate for the asset class in your market, you have created no value — you spent more to build than the stabilized asset is worth. Target a spread of 150–200 basis points above the market cap rate as a minimum. If flex industrial trades at 7% in your market, you need to build at a return on cost of 8.5–9% to justify the development risk.
Once you layer in financing, the relevant number for an equity investor is cash-on-cash: annual net cash flow after debt service divided by total equity invested. A contractor garage with 65% LTV construction financing and a 7% interest rate will look materially different than the same project with an all-cash buy. Model both. Know which scenario you are actually in.
Enter your project parameters below. Results update in real time using standard industry assumptions: 15% vacancy, 25% operating expense ratio.
Assumptions: 15% vacancy/credit loss applied to gross revenue; 25% operating expense ratio applied to effective gross income. Break-even = total build cost / annual net revenue × 12. Cash-on-cash = annual net revenue / total build cost. These figures represent unlevered returns before debt service. Add financing to model levered cash-on-cash.
The calculator above gives you unlevered, stabilized returns. Here is how to interpret each output and where developers typically go wrong:
This is the theoretical maximum — every bay leased, every month. You will never hit this number in practice. It is useful as a benchmark, not a forecast. If your gross revenue feels too low at full occupancy to justify the development cost, the deal does not work at any reasonable vacancy assumption. Do not continue.
This figure applies a 15% vacancy haircut to gross revenue, then removes 25% of the result for operating expenses. The 15% vacancy assumption is appropriate for a stabilized, well-located facility with an established tenant base. If you are in lease-up or in a market you have not tested, model 25–30% vacancy instead and see what happens to your net revenue. The output should still be serviceable on the debt you plan to carry.
Break-even months tells you how long it takes to recoup the total development cost from net cash flow at stabilized occupancy. This is a rough payback period — it does not account for financing costs or time value of money. A break-even of 60–84 months (5–7 years) is typical and acceptable for a flex industrial development with strong tenants. Anything above 10 years warrants a hard look at whether you are overcapitalizing the project relative to the rent the market will bear.
The unlevered cash-on-cash return is your NOI yield on total invested capital. Target 8–12% on an unlevered basis for a secondary-market contractor garage. If you are financing with 60–70% LTV debt at 7–8% interest, your levered cash-on-cash will be higher — but your risk profile changes materially. A 10% unlevered return with 65% leverage at 7.5% interest rate typically produces a 14–18% levered cash-on-cash, depending on amortization schedule. Model both before deciding how much to borrow.
The most common error in flex space pro formas is assuming month-one stabilized occupancy. Real lease-up takes 12–30 months in most secondary markets. Build a separate lease-up scenario that ramps from 40% occupancy in month one to 85% occupancy by month 24. Run the cumulative cash deficit during that period against your equity reserve. If you cannot fund the gap, the deal is undercapitalized before you break ground.
Validate whether your site actually pencils before you commit capital. 15 interactive items covering site selection, financial modeling, and tenant pipeline — takes 20 minutes.
The calculator gives you a clean financial picture. Markets are messier. Three factors materially affect contractor garage investment returns that do not show up in a spreadsheet until it is too late:
From certificate of occupancy to 85% occupancy, you are servicing debt and paying operating costs on partial revenue. The gap between what the stabilized model shows and what you actually collect in months 1–18 can easily run $80,000–150,000 on a 10-bay project. That capital needs to exist before you start construction, not be assumed away in a best-case forecast. See our flex industrial pro forma guide for a full lease-up model template.
Ten bays leased to ten sole-proprietor contractors is a different risk profile than ten bays leased to three established HVAC companies and seven solo operators. Diversification matters, but so does the depth of your local contractor market. A market with 50 active licensed contractors within 10 miles can sustain 10 bays. A market with 15 can sustain 3 or 4 before you are fishing in the same pond every time a bay turns. Validate your tenant pipeline before you finalize your pro forma. Our contractor garage ROI guide covers tenant pipeline analysis in depth.
Budget overruns on light industrial construction in the current environment average 12–18% over the original estimate when developers do not have a fixed-price GC contract. A 15% cost overrun on a $1.2 million project adds $180,000 to your denominator — which drops your unlevered cash-on-cash from 19% to 16.5% at the same income level. That is still a good return, but the cushion shrinks. Always underwrite to a 10–15% contingency and get at least two firm bids before you lock in your development cost assumption.
Abstract return calculations are more useful when you can anchor them to real-world ranges. Here is what stabilized flex industrial development ROI looks like across three development scenarios in secondary markets:
The base case — 10–14% unlevered cash-on-cash at stabilization — is achievable with disciplined execution: a well-located site, market-rate rents with data to support them, and a realistic lease-up timeline. The upside scenario requires genuine supply scarcity and a tenant pipeline you have already partially validated. Do not build to the upside. Build to the base case and let the upside surprise you.
For a more detailed breakdown of how these numbers compare against self-storage and other competing uses, see our article on contractor garage vs. self-storage ROI. The comparison is more nuanced than most developers expect.
After reviewing dozens of flex industrial pro formas, the errors that consistently turn good-looking deals into disappointing returns cluster around three patterns:
If the market range for contractor bay rent in your area is $250–375/month, the temptation is to use $350 in your pro forma. That is 40% above the low end. If the actual market-clearing rate turns out to be $275, your income is 21% lower than projected before vacancy even enters the picture. Use the midpoint of verified comparable rents, and only move toward the high end if you have waiting-list demand to support it.
Construction costs vary 20–35% between markets. A developer who built in Tennessee cannot use those cost figures for a project in Colorado without re-quoting locally. Get real bids in the actual market. The flex space ROI figures that get passed around in investor decks are often anchored to low-cost build markets and create dangerous expectations when applied elsewhere.
Cash-on-cash return answers "what do I earn each year?" The equity multiple answers "how much do I make over the hold period including sale?" A project with 12% annual cash-on-cash but declining NOI will produce a mediocre equity multiple. A project with 9% annual cash-on-cash and growing rents in an appreciating market may produce a better equity multiple at sale. Model both metrics across a 7–10 year hold before committing capital. The full course module on financial modeling covers the complete hold-period analysis — check the validation checklist to see if your project is ready for that level of analysis.
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The calculator above gives you a fast read. The full course gives you financial modeling templates, a detailed lease-up model, rent comps methodology, and a step-by-step framework for building a pro forma that will survive lender scrutiny and partner due diligence.
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