CBRE: Flexible Office Space Properties Can Outperform Market

Office buildings that include flexible space can sell for more than regular office buildings in their market, but it depends on several factors, reported CBRE, Los Angeles.

CBRE examined 31 transactions closed within the past five years of office buildings with at least 10 percent of their square footage dedicated to flexible space. It found nearly 40 percent of flex space transactions achieved values greater than their market’s average. But another 52 percent transacted at values roughly equal to their respective market average.

“In some cases the 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,” said CBRE Americas Head of Occupier Research Julie Whelan.

Whelan said property owners can boost their property’s value beyond their peers by investing in build-outs and “progressive” real estate structures such as partnerships with flexible space providers.

The study found most buildings with modest portions of their square footage dedicated to flexible space registered no impact to their cap rates–a measure of a building’s value relative to its cash flow. In transactions of office properties with less than 40 percent flexible space, more than two-thirds produced cap rates equivalent non-flex peer transactions.

Conversely, in transactions where flexible space made up more than 40 percent of the building, nearly two-thirds produced higher 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,” Whelan said.

CBRE acknowledged the relatively small sample set of 31 properties. But the report said a clearer valuation picture will emerge as flexible workspaces become more widespread and more buildings with this space are sold.

“Despite our expectation that the flexible space segment will continue to mature and expand in the coming years, real estate fundamentals will remain the most important consideration for investment, regardless of the presence of flexible space,” Whelan said.