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.

GlobeSt.com: The hotel market is also the first real estate asset class to see the impacts of a down cycle or even the potential for a down cycle. Will flexible office leasing make office more susceptible to market fluctuations?

Gilbreath: We'll need to see how flexible office fairs in the next inevitable cycle—and it is coming sooner than later. If you look to how the self-storage has faired through the last several cycles, it has generally been cycle independent. On an up economy people are getting more stuff and creating more need for storage space. The down cycle of an economy serves as a driver of a more storage needs. I will get speculative” I think that you are more likely in the office industry to see the more counter cyclical benefits far more than you do in hospitality. Hospitality thrives on an up cycle, but in office, companies may move from long term lease to a smaller office, and we are already seeing larger corporations that are cautiously taking on new office space to meet their needs because they are choosing to do so with flexible office commitments because they are anticipating the down cycle.

GlobeSt.com: I assume that this means there is substantial growth in the flexible office niche, if it is projected to catalyze a shift in office leasing and valuation.

Gilbreath: It is enormous, and I will give you some numbers to illustrate how much growth might lie ahead of us. If you define flexible office as only co-working and serviced office centers, then that portion of the physical office space is .7% of the US office stock. JLL predicts that by 2030, 30% of all office use will be flexible. Brookfield suggests that inside of five years, 20% of their portfolio will be allocated to flexible space.

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

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

GlobeSt.com: I assume that this means there is substantial growth in the flexible office niche, if it is projected to catalyze a shift in office leasing and valuation.

Instant Insights /

Why Has Long-Term Leasing Dominated Office?

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