Short-Term Leases Complicate Underwriting

If the pandemic has infused business with any one idea, it’s flexibility. Companies need to be flexible to get work done. Employees want flexibility to work but also be safe and manage personal and family obligations.

Flexibility has largely come down to space and uncertainty. When executives aren’t sure what normal will look like in where employees work, they can’t tell how much office space they need. While some sectors of commercial real estate are stable in terms of tenants, others are a question. That’s leading to some pushing for shorter-term leases—ironically, both by tenants and some owners—as well as headaches for underwriting as the predictability of tenancy is up in the air.

The impact short-term leases could have on overall markets depends on their number, and that’s tough to estimate, as it can vary greatly by location and type. Visual Lease is a proptech company that tracks several hundreds of thousands of leases in its systems. CEO Marc Betesh says that, first, it’s still early to see what’s happening, as given average lease turnovers of about five years, only roughly 20% of them have been at a natural point of renegotiation.