Technology May Be Able to Add Flex Space to the Valuation Equation

By Franco Faraudo

While the failures of co-working giants like Knotel and WeWork may have highlighted flex space’s challenges, the demand for flexible real estate options remains strong. These failures were largely due to business model weaknesses, not a lack of market interest. In a recent occupier survey conducted by CBRE more than half of the respondents want flexible access to shared building services and amenities and nearly two-fifths want the ability to structure their lease and manage costs based on actual utilization of space.

Flex space offers occupiers the adaptability they need in today’s dynamic economy. But, there hasn’t been the wide-scale adoption of flex offices that many have expected. One reason for this is that traditional valuation methods don’t include revenue generated by flex spaces as part of the long term cash flow due to their perceived risk. Fortunately, new advancements in valuation technology are providing solutions to understand and quantify the value of flex space.

Commercial real estate values typically rely on the predictability of long-term leases. With flex space, month-to-month rentals create uncertainty for investors and lenders, as tenants can easily leave during economic downturns. This perceived risk often devalues flex spaces, even though they can generate higher margins and increase building density. On top of that, the flex space market lacks the comprehensive datasets found in traditional leasing. Sales prices are more readily available than the specific lease terms that drive valuation, creating opacity and making it difficult to establish reliable benchmarks for flex space value.

Emerging valuation technologies are beginning to address these challenges. Companies like Cherre are collecting and analyzing data on flex-space leases, including net effective rents, vacancy rates, and build-out costs. This data will be critical in establishing market trends and comparable transactions, increasing accuracy in valuations. Platforms like Valcre are developing valuation models specifically designed for flex space. These models consider the unique characteristics of flex space, such as potential revenue upside, operational costs, and market dynamics, providing a truer picture of value. New risk assessment tools incorporate factors like tenant diversification, market conditions, and operator experience to better quantify the risks inherent in flex space. This can inform underwriting decisions and help secure financing.

While the short-term nature of flex space leases increases perceived risk, they also offer advantages. Flex space provides companies with the agility they need to scale up or down based on their evolving needs. Flex space providers can command premium rents compared to traditional leases, offering the potential for higher returns. Plus, flexible space can be a valuable amenity within a building, attracting tenants seeking more dynamic work environments. In today’s office market, with high vacancy rates, hybrid work schedules, and a preference for amenity rich workspaces, there is more need than ever to provide security for occupiers that often don’t want to take the risk of a large office lease.

The future of work is trending towards increased flexibility, and flexible workspaces are positioned to play a key role in this shift. As technology for valuing these spaces matures, investors will gain a clearer and more confident understanding of their true worth, leading to a more efficient and accurate market. But, a change in perspective is needed, particularly among lenders in the real estate industry. Currently, flex space is often seen as a risky and volatile revenue stream, potentially even harming traditional leasing efforts within a building.

This perception needs to evolve. Flex space, encompassing co-working and other flexible office arrangements, can be a source of income in both good and bad economic times – when companies seek to expand quickly or need to contract their space needs. Having flex space can actually make a building more attractive to tenants by providing a variety of workspace options and catering to the growing demand for flexibility. Once buildings with flex space demonstrate their resilience during economic downturns, lenders will likely become more receptive to their value proposition.

Valuation and Underwriting Technology

Cutting-Edge Data and Tech May Be Real Estate’s Best Hedge Against Soaring Risk

Quantifying risk in real estate investments has become increasingly complex, especially with new factors like rising interest rates, natural disasters, and high vacancy rates posing threats. To better calculate and mitigate risks while still pursuing rewarding opportunities, the industry is turning to new data-driven techniques. This includes leveraging technologies like advanced scenario modeling, computer vision for property assessments, and comprehensive climate data analysis.

The Future of Commercial Real Estate Valuation Could Be Shaped by Machines

While automated valuation models (AVMs) disrupted residential real estate pricing, they’ve had minimal impact on commercial valuations so far due to the complexity of factors like rent rolls, lease terms, and lack of public data. Major firms utilize AVMs to quickly flag potential mispriced properties, but they struggle with qualitative nuances that seasoned appraisers recognize. As data quality improves through technologies like computer vision and AI/machine learning capabilities advance, AVMs may become more accurate commercial valuation tools.

Bracing for Commercial Real Estate’s Revaluation Surge

An upcoming surge in commercial real estate revaluations presents a significant opportunity for appraisers who can quickly deliver accurate reports. Technology will play a crucial role in meeting this demand, and appraisers must carefully consider whether to invest in an established appraisal software solution or build their own. This decision has major implications for efficiency, focus, and ultimately the ability to handle increased appraisal volume.

Bytes

⛓️ On chain: A new academic research paper has been published by researchers at Curtin University in Perth, Australia that shows how to create a tamper resistant time stamp for real estate transactions on the Ethereum blockchain protocol.

💸 Unkind exchange: The Biden administration has proposed eliminating the 1031 exchange program.

🗳️ Tax transferred: A controversial transfer tax has been voted on in Chicago and early ballot counts are showing that it did not get the votes it needed to pass.

Thank you for reading the Propmodo Technology Newsletter! I’d love your feedback, ideas and tips: travis@propmodo.com.

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