Are Offices With Flex Space More Valuable?

Office buildings with flexible space options could hold a higher value. A new report from CBRE looks at recent office transactions, and found that 40% of buildings with flexible space traded at a higher value than the average office building in the market while 52% of buildings traded on par with the market average.

“The presence of flexible office space is correlated with better pricing and higher value in some properties but not all. Those that have achieved more favorable results are typically smaller, older buildings in hot submarkets with strong real estate fundamentals driven by job growth, especially in the tech sector,” Julie Whelan, head of occupier research for the Americas at CBRE, tells GlobeSt.com. “In these markets, the presence of quality flexible space operators can contribute to a more modern building aesthetic and help attract and retain tenants, making these properties more appealing to investors than other nearby class-B options. If the landlord enters into partnership agreement with the flexible space operator, it could even lead to increased cash flow.”

Often, a presence of flexible space is most common in newer or renovated office buildings, and that could account for the boost in pricing among some of the properties. “At the very least, flexible space operators are improving the quality of the space that they lease through a more modern workplace design,” adds Whelan. “This design typically infuses activity-based workplace concepts with a residential-type aesthetic. The more space an operator leases in a building the more influence they may have over renovations in the exterior and common areas of the building. The physical renovations of course add value to the building along with the tenant attraction that the aesthetic and subsequent amenities provide.”

The study analyzed 31 office transactions with flexible office space over five years. This period really represents the early emergence of flex office, a time when landlords have been hesitant to partner with flexible office operators. This news, however, could encourage more partnerships. “It is early in the life cycle of flexible office providers and many landlords are cautious about working with them given concerns around their credit quality and the inherent risk of leasing a large amount of space to one tenant,” explains Whelan. “However, the occupier interest and growth in this sector of the real estate market cannot be ignored and progressive landlords—particularly in primary markets—must pay attention. I expect landlords with scale to ultimately dedicate a percentage of their portfolio to either their own flex offering or explore partnership agreements with third parties.”

Office spaces in general have seen an upward trend in pricing as well. In Los Angeles, specifically, market fundamentals have remained healthy and asking rents outpaced the national average, making the city one of the top office markets in the US. “Cap rates for both urban and suburban office properties in Los Angeles have held steady over the past year across all asset classes and market fundamentals remain sound,” says Whelan. “Furthermore, investors responding to CBRE’s Americas Investor Intentions Survey indicated that Los Angeles/Southern California was the most attractive market for investment in the Americas for three consecutive years.”