A CBRE analysis of recent office building sales found a majority of those with flexible workspaces sold for either more or roughly the same as properties without flex space and also had cap rates lower than national and market averages.
The study, which looked at 31 transactions of buildings with at least 10 percent of square footage devoted to flex space within the past five years, found nearly 40 percent of buildings sold achieved values greater than average for their market. Another 52 percent of those deals had values about the same as their market averages.
“Our analysis found that 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,” Julie Whelan, Americas head of occupier research at CBRE, said in a prepared statement. “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.”
When comparing the sales on a per square foot basis, the study found 43 percent of flex transactions had a higher price, 33 percent were on par with their peers and 23 percent had a lower price per square foot.
Comparing cap rates
CBRE found most flex transactions had cap rates lower than the national and market averages, most likely because flex operators tend to choose active investment markets and high-quality buildings for their locations. But there were differences based on the amount of flexible workspace in the building as well as the class of the building. In transactions of office properties that had less than 40 percent flexible space, 67 percent produced cap rates on par with non-flex peer transactions, the CBRE study determined. The analysts found when flexible space comprised more than 40 percent of the building, 64 percent produced cap rates less favorable than peer transactions.
One factor may be that buildings with high flexible space concentrations may locate more frequently in Class B assets. The study found most Class B flex transactions—57 percent—had higher cap rates than their peers. But it also noted 21 percent had lower cap rates, suggesting that some investors aren’t scared off by the risk of coworking operators.
By comparison, most Class A flex transactions—77 percent—had cap rates that were generally equal to their peers. However, none outperformed their peers on cap rates.
“Flex transactions that have performed well are primarily in markets in the West that have real estate activity driven by the tech sector,” Whelan told Commercial Property Executive. “Properties across the country in markets with strong employment gains, low vacancy and positive net absorption can benefit from the tenancy of flexible space operators.”
Manhattan had the most flexible space by square footage among the top markets tracked by the CBRE study. It had 12.5 million square feet of flex space representing 31 percent of the office inventory and 39 percent year over year growth. Boston had 3 million square feet of flex space representing 1.4 percent of the office inventory and 28 percent year over year growth. On the West Coast, Seattle had 2 million square feet of flex space representing 1.9 percent of the office inventory with 59.7 percent year over year growth. In San Francisco, there was 2.4 million square feet of flex space representing 2 percent of the office inventory and 46.3 percent year over year growth. In the Midwest, Chicago had 3.2 million square feet of flex space representing 1.4 percent of the office inventory and 22.9 percent year over year growth.
CBRE notes this was a small sampling but it does offer some insights to investors who may have been concerned about the risks of buying a building with flexible workspaces. Coworking is the dominant type of flexible space solution today and accounts for more than 25 million square feet of space in the country’s 30 largest office markets. Flex space is expected to continue to expand to about 10 percent of Class A office space nationally by 2028.
“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.
Image courtesy of CBRE