Julie Whelan
There has been anecdotal evidence that commercial real estate investors grew more cautious about an office building if there was a high concentration of coworking space in it. New research from CBRE presents a more nuanced picture of this question but basically arrives at the conclusion that investors tend to be less sensitive to higher concentrations of coworking than previously thought. And in fact, in some cases presence of flexible-space tenants–and the building improvements they initiate–may benefit overall property values, causing some lower-classified buildings with flexible space to perform as if they were Class A assets, according to Julie Whelan, CBRE Americas Head of Occupier Research.
It is a welcome data point to a growing question in the industry, which is how to value buildings when there is a coworking component to it.
It should be noted, however, that this study was conducted during a favorable cycle for commercial real estate.
“CRE fundamentals have been very strong this cycle,” Whelan tells GlobeSt.com. “There has not be crazy rent growth and vacancies have remained low so it is a pretty safe environment for a moderate amount of co-working.”
What will be telling, she says, is when the economy turns recessionary. When that happens, she predicts, valuations might change and the coworking industry will likely enter a period of consolidation.
40% Achieved Values Greater Than the Average
Whelan, along with Taylor Jacoby, Senior Research Analyst, undertook an analysis of recent national building sales that include flexible office space. It found that 52% of the deals were sold at values roughly equivalent to their respective market average, while nearly nearly 40% of the transactions achieved values greater than the average for office buildings in their market.
One differentiator appears to be the buildouts that accompany coworking. “By investing in build-outs and progressive real estate structures, such as partnerships with flexible space providers, landlords can differentiate their properties and, under the right circumstances, boost their value beyond that of their peers,” Whelan says.
The analysis included 31 transactions within the past five years of buildings with at least 10% of their square footage dedicated to flexible space. It also compared sales of buildings with flexible space to sales of similar, same-market buildings without flexible space.
Concentration Matters — To a Certain Extent
The study found that most buildings with modest portions of their square footage dedicated to flexible space registered no detrimental impact to their cap rates. In transactions of office properties with flexible space comprising less than 40% of the building, 67% produced capitalization rates on par with non-flex peer transactions.
Conversely, in transactions where flexible space comprised more than 40% of the building, 64% produced cap rates less favorable than in peer transactions.
The divergence is likely due to the perceived risk associated with higher concentrations of flex space, as well as the fact that buildings with high flexible space concentrations are much more likely to be Class B buildings, CBRE concluded.
There is a concentration effect, Jacoby tells GlobeSt.com, but when looking at the real data it seems that investors are less sensitive to it than previously thought. “We saw it had some impact but not a very strong negative impact,” she says.
Taylor Jacoby
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
