A decade ago, he cofounded the first full-service global coworking consultancy, OpenWork Agency, which in April 2023 spun off to create CoworkingConsulting.com. David and his partners have helped clients launch coworking businesses in places such as Nairobi, Singapore, Bahamas, Dubai, and numerous locations across the USA.
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As we move further into the era of flexible office space, the underwriting process for commercial real estate office buildings is changing significantly.
To effectively engage with this shift, it is crucial to understand the dynamics of underwriting office buildings with a flexible leasing model, as well as the implications for office portfolio strategy.
Underwriting in the Flexible Leasing Model
Traditionally, underwriting for office buildings has been based on a set of well-established assumptions regarding income stability. These assumptions are grounded in long-term leases, typically with a single or limited number of tenants, providing a predictable cash flow. However, the flexible leasing model disrupts these assumptions, requiring a fresh approach to underwriting.
- Cash Flow Volatility: The first major point of consideration is the inherently higher volatility of cash flow in the flexible model. Short-term leases and coworking agreements can lead to higher turnover rates, which makes income less predictable. To account for this, underwriters must assess the local market dynamics, including the demand for flexible space and the competitive landscape.
- Operational Complexity: Flexible spaces require more active management, which may increase operational costs. Underwriters need to take into account factors such as community management, marketing efforts, and IT support, which are essential to maintaining a high occupancy rate in a flexible space.
- Asset Value: The flexible leasing model may affect the valuation of the asset. Buildings with a high percentage of flexible space may be seen as viable investment propositions, especially in markets where demand for such space is strong. Underwriters need to consider the potential uplift in value from successful implementation of a flexible space strategy, balanced against the associated risks and costs.
Office Portfolio Strategies
When it comes to office portfolio strategies, the inclusion of flexible spaces demands a fresh perspective. Here are some critical considerations:
- Diversification: Including flexible office spaces within a portfolio provides diversification. The exposure to different types of tenants and lease structures can help to mitigate risks associated with any one market segment or lease type.
- Tenant Attractiveness: The demand for flexible work arrangements is growing. Incorporating such options into a portfolio makes it more attractive to potential tenants, potentially increasing occupancy rates and reducing lease-up periods.
- Operational Efficiency: A portfolio that includes flexible spaces may require more active management. This could involve developing new capabilities, such as community management and flexible space operations, or partnering with specialized operators.
- Risk Management: Portfolio managers must carefully balance the potential benefits of flexible spaces with the associated risks. This could involve setting limits on the proportion of a portfolio allocated to flexible spaces and ensuring a robust risk management process is in place.
The flexible leasing model is reshaping the commercial real estate landscape, introducing new dynamics into underwriting and portfolio management. By understanding these changes and adapting to them, investors, facility managers, and building operators can navigate this new terrain and leverage the potential of the flexible leasing model to the fullest.