Prior to the pandemic, tenants began shortening their leases in big cities as they shifted to more flexible operations. Over the past year, this trend has only been accelerated.
Because of this, some analysts believe that tenants who continue to opt for short-term leases will aid in driving down office valuations.
“When somebody goes in there to determine the value of the property, there’s going to be a risk each time a tenant leaves,” said Lisa Knee, co-leader of EisnerAmper’s national real estate practice. “Whether it’s a short-term lease or you terminate a lease early, the appraisers or the banks are going to look at that because that’s going to create risks.”
Moving forward, landlords must decide how much of a say tenants will have in lease terms with shorter commitments, and may need to pull back on certain amenities because of how exposed they are due to this model.
One of the biggest factors that could expose landlords are high-in-demand tenant improvements. Since landlords do not have much time to write off these enhancements, their offerings may not be seen as favorable to tenants, especially due to rent increases.
However, incorporating some sort of flexible workspace could be a solution for these building owners. Partnering with a coworking operator allows landlords to easily reconfigure their space, provide the flexibility that tenants are desiring and still get higher rent.
