Short-Term Leases, Impact on Valuations Take Center Stage
The gig economy, where temporary jobs can be commonplace and where companies often hire independent contractors and freelancers rather than full-time employees, has had a dramatic impact on Commercial Real Estate (CRE) and its practitioners. “The gig economy, with its short-term contracts and freelance work, has not only redefined traditional employment, but also transformed how urban spaces are utilized and valued,” noted a July 3 LinkedIn post by Lowery Property Advisors, LLC. “This transformation has had profound implications for commercial real estate, influencing demand, usage patterns, and property valuations in significant ways.”
The post goes on to cite a boom in co-working spaces; more flexible leasing options with traditional long-term leases becoming less common; a rise in multi-use properties; and technological integration, which attracts gig workers and leads to higher valuations, as highlights of the changes wrought in CRE by the gig economy.
Another recent commentary cautions that these changes carry with them their own risks. For example, the post asserts, short-term leases “create a ticking time bomb for the whole industry; any dip in the economy could mean these contracts will not get renewed and units will stay vacant as renters cut costs.”
The post also notes potential regulatory issues that could have a negative impact. For example, “Authorities in Boston are looking at how to regulate the industry. Corporate and co-living spaces offer similar high-end services and finishes as they yet are not taxed like hotels, and, hence, are able to offer more competitive prices.”
SIORs have certainly recognized the impact of the gig economy. “On the office side of things — which I specialize in — we are seeing increased vacancy,” says Braxton Anthony, SIOR, principal of Rich Commercial Realty in Raleigh, N. C. In the Raleigh-Durham-Chapel Hill area, he notes, approximately 70 people move into the area per day. One would think that statistic would be encouraging from a positive absorption perspective, but most of these people are working for companies that do not have a local brick and mortar facility.
“Instead,” says Anthony, “They offer a remote work policy or are utilizing coworking options. Flexible, shorter-term leases are desired, and some companies will pay a premium for this. Therefore, and unfortunately, the office sector is not seeing the full benefits of this migration as total vacancy, including sublease availabilities, has reached 20% market wide and continues to climb.”
Our real value to the client is to help them be more strategic; to help them diversify their real estate portfolios. And we have to continuously adapt: as the gig economy changes, it will continue to impact how we do our CRE business.
“I think a lot of people in the gig economy work from home, or if they go to the office (it’s) on a hoteling basis,” adds Andrew Brod, SIOR principal with Cresa Global, Inc., in Houston. “People who are just needed on a contract basis are going to be in your ‘B’ buildings. Despite that draw, he shares, “Our Class B buildings are really hurting.” He adds that gig workers might be more likely to work in the suburbs.
Tim Vi Tran, SIOR, president of The Ivy Group in Fremont, Calif., says that most office tenants want flexible workspaces with shorter-term leases, shared amenities, and, to some extent, network operations. “It’s had a big impact on office and industrial property,” he asserts. “Even on the retail side you’re starting to see pop-up shops.”
Years ago, he continues, if a landlord knew a tenant only wanted a six-month lease they’d say, “Forget it.” Today, not so much. “A lot of these folks look for short-term leases without commitment, and they want to be near everything,” he says. He, too, has seen a shift from urban to more suburban office locations. The gig workers, he adds, look for work-life amenities like cafes, gyms, bike lanes, being close to parks, and walking trails.
STRATEGIES, CLIENT ADVICE IMPACTED
Tran says the gig economy has definitely impacted how he approaches client services and counseling. “We have to provide customized, tailored solutions to our clients, and some of the things we’re more cognizant of include having flexible lease terms, short-term rental options, and even looking at spaces that can be reconfigured — which was kind of rare in the past,” he shares. Early termination leases (which he never really liked before) are now negotiable. “You also have to be more focused on logistics centers, and dealing with tenants who request things like smart buildings, and high-speed Internet,” he notes.
Tran is keenly aware of what employers of gig workers want because he is one himself. “My company works with virtual assistants from the Philippines, looking for specific skills,” he explains. “That’s one less desk I have to pay for; we do everything online.”
“It affects how we plan an office for a client — like hoteling, plug ‘n play workstations, etc.,” says Brod. “We either have workstations spread out or build little individual offices for hoteling.”
Tenant demands have also changed, he notes. They require technology that adequately supports Zoom or Teams calls, for example. “My computer is hard-wired throughout the network, but we also have Wi Fi throughout our space,” he offers. Noise cancelling systems are also in demand, he adds.
LOCATION, LOCATION, LOCATION
Clients are also looking for geographic areas where there the gig economy is stronger, say SIORs. “Both office and industrial properties focus on spaces where the gig economy is stronger — and that has to do with the need for efficiency in finding workers,” says Tran. “For example, there is greater demand for urban warehouses with the rising gig economy — the need to be close to city center so you can be close to where the gigs are.” Warehouses, he adds, also must have the flexibility to scale up and down quickly.
“I think the gig economy is having a much more positive effect on the industrial market, since you don’t have remote/hybrid work polices affecting the real estate footprint,” says Anthony. “My guess is technology is a much bigger threat to industrial than the gig economy.”
Industrial is clearly impacted in the Houston area, says Brod. “All these suburbs have big industrial users — Amazon, FedEx, UPS — any of those companies will build these big facilities on the outskirts of town,” he says. “Obviously, that’s economics; the land is cheaper. But they also have all the people that live out there to support gig jobs. Take Amazon; how many gig workers do they hire?”.
We have to provide customized, tailored solutions to our clients, and some of the things we’re more cognizant of include having flexible lease terms, short-term rental options, and even looking at spaces that can be reconfigured — which was kind of rare in the past.
A FAD, OR A PERMANENT CHANGE?
Do SIORs see the gig economy as a passing phase, or as a permanent change in the market? “I used to think of it as a fad, but increasingly I think it’s more become part of a permanent change,” says Tran. “Gone are the days of the 9-5 job.”
He cites a local apartment investment firm of five people that has 30 Filipino virtual assistants — and a portfolio worth $700 million. “Is this the real thing? I’m actually in it!” he says. “As agents, we need to recognize that this is the way things are going. Our real value to the client is to help them be more strategic; to help them diversify their real estate portfolios. And we have to continuously adapt: as the gig economy changes, it will continue to impact how we do our CRE business.”
Anthony agrees. “I think the gig economy is here to stay due to advancing technology, flexible work policies, and younger employees entering the labor market,” he asserts.
Brod makes it unanimous. “Because of technology, as long as people can have flexibility, I do not see it going anywhere,” he says. “People do not want to be chained to their desk 9-5; in my industry I can work from home as easily as I can from the office. I see the gig economy staying; it’s more of a hybrid work environment, and I don’t think it’s ever going to leave.”
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
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