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Why Has Long-Term Leasing Dominated Office?

August 14, 2017

Why Has Long-Term Leasing Dominated Office?

August 11, 2017 | Kelsi Maree Borland | GlobeSt.com

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Office has always been a direct- and long-term leasing-driven market, but the growth of short-term and flexible office options may be changing that. Historically, capital sources haven’t recognized short-term office leases as part of an office property’s cash flow—like it does in the hotel and self-storage markets. Mark Gilbreath, the founder and CEO of LiquidSpace, says that the demand for short-term space is growing and traditional office owners are incorporating flexible lease options into their buildings. His prediction is that in the next three to seven years, capital sources will value flexible space in the underwriting of an office asset. We sat down with him for an exclusive interview, where he gave us more details about the changing office market and how flexible office is becoming an standard in the market.

GlobeSt.com: Why has long-term leasing been the cornerstone of office leasing historically?

Mark Gilbreath: Among the reasons is that the way that commercial office is underwritten and financed is dependent on long-term lease commitments. Banks, creditors, underwriters and REITs, even, look to value long-term leases only in the valuation of the property. If a given owner did a month-to-month lease transaction with a client, historically the value of that cash flow would not be factored into the value of the property, meaning that an owner would get no credit from the value standpoint for flexible term deals. By contrast, other real estate asset classes, like hotels, where the lease is night-to-night, or self-storage, where the standard tenancy term is month to month. Those are both highly valued and creditors and underwriters have reconciled that there is strong and enduring demand with predictable revenues, even though they operate on short-term leases.

GlobeSt.com: Do you think that will change because of the popularity of short-term leases?

Gilbreath: A prediction that I will make about the office industry is that we are entering a period where creditors and underwriters are going to recognize that there is predictable demand and predictable revenue for owners that are making space available on more flexible terms. In fact, I will even predict that the most savvy owners are learning that they can charge a premium for space when they make it available on flexible terms. So, the overall cash flow of a property can be enhanced by filling open spaces and by maximizing the revenue through higher rates in exchange for the flexibility that they provide. I predict that in the next three to five years you will see building owners and their creditors aligning around the value of flexible term deals.

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Gregory De Jong, CFP, Co-Founder of Paragon Advisors, LLC.
July 7, 2015

Blue Vault is just what advisors need to size up the different offerings in the nontraded REIT market. Just as importantly, it’s what the industry needs to encourage best practices among REITs.