Capital markets are unsettled for buildings with space leased to flex-office operators, but there are circumstances where flex-office commitments can keep favor with lenders and investors, according to a new report from CBRE.

Transaction data for 2019 activity shows that office buildings with a third or less of their square footage dedicated to flex-space operators have seen little to no impact on their value, according to CBRE. Still, Investor and lender sentiment about flex-office space has shifted since the fall due to a retrenchment and slowdown of the industry.

At this time, lenders and investors seem more tolerant of flex-space exposure of less than 15 percent. That allows other considerations to take precedence in underwriting, such as the fundamentals of the building’s local market and overall tenant mix. At year end, more than half of U.S. and Canadian office buildings with a flex-space provider came in below that 15 percent threshold.

“Flexible space can benefit a building’s tenant mix and income without deterring lenders,” said Julie Whelan, CBRE Americas Head of Occupier Research. “Even though recent events have created headwinds for flexible-space operators, the model remains viable and beneficial in various applications. Emerging models, such as asset-light arrangements, will only help to strengthen the perception of this industry into the future.” 

CBRE’s report shares some insight into how investors and lenders are viewing this space:

• Nearly half of U.S. leases by flexible-space operators were signed before 2017, meaning those rents are well below current market rates. If the flex operator were to vacate, that space might be leased at higher rates to new tenants.
• Investors and lenders have more confidence in flex-operator leases backed by strong covenants, such as corporate guarantees by strong-credit parties, hefty security deposits and remedies for defaults.
• Investors and lenders can see value in an “asset-light” approach in which a flex-space operator manages flex space for the landlord for a fee but doesn’t contractually lease the space for itself. This approach allows the landlord more control over the space, more visibility into its financial operations and removal of the possibility of the operator defaulting on its lease.

To download the full report, click here

About CBRE Group, Inc.

CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.