PHILADELPHIA-Corporations anticipate a growing need for real estate flexibility and are willing to pay for flexible lease terms, according to a study unveiled by CoreNet Global’s Applied Research Center during the organization’s Global Summit here. Yet, corporate real estate executives say they don’t have the tools or processes for real options analysis that would explicitly evaluate flexibility.

Real options analysis, a method for valuing lease flexibility, is widely practiced in the UK, according to Eric H. Bowles, CoreNet’s director of global research and author of the study. He tells that eight out of 10 property owners in the UK use a software program that provides real options analysis, but no such software tool exists in the US.

“Property owners are comfortable with floating rates in the financial aspects of their businesses,” Bowles says. “When lease rates, or portions of a lease that are subject to a tenant’s anticipated need for flexibility, float according to market rates, the owner would always be at market rate.”

The study is based on a March survey of 48 members of the research center’s “expert survey panel, 92% of whom represent the end-user perspective,” Bowles says. In the survey, 93% said they would pay for lease flexibility and 92% anticipated that the level of flexibility their companies require would increase by 2010. They perceived the landlord as the greatest barrier to flexibility “and many also acknowledged that the broker may be at the heart of the resistance.”

Between now and release of the full report to CoreNet members at the organization’s fall summit in Orlando, Bowles says the research center hopes to identify companies that might create software for calculating real options analysis. In addition, the report urges cooperation on the adoption of flexible lease terms.

It contains recommendations for both tenants and property owners. Owners are urged to develop or purchase software programs that can be adapted to provide real options analysis in valuing flexibility. Secondly, it calls on them to educate brokers on how to use this tool and begin to structure transactions that offer more flexibility. “We view this as a money-making opportunity for landlords,” Bowles says.

Tenants are urged to become familiar with real options analysis as it applies to real estate. “They should also start gathering data on what it has cost their companies to terminate leases in the past in order to determine what flexible leasing could save them in future agreements.”

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