Underwriting potential projects is one of my favorite parts of my job at Factory—the analysis, the strategy, the potential to uncover hidden value. But here’s the issue: far too often, I walk away feeling that something’s just not right. It’s frustrating, and it’s a bigger problem than many realize. Let me explain.
A Fast-Changing World
For decades, commercial real estate (CRE) has been valued like rock-solid bonds. Long-term leases, predictable cash flows, and stable tenant demand allowed investors to sleep well at night, confident that their assets bring in steady returns. But in today’s world of shorter leases, volatile markets, and shifting tenant demands, this method feels like navigating with a paper map in the age of GPS—outdated and far too simplistic.
The world has changed. So should how we value commercial properties.
The End of Predictability
Historically, real estate valuations were anchored in stability. Landlords could count on tenants signing 10- to 20-year leases, providing a clear income stream for decades. The capitalization rate method, which compares income to a market rate of return, worked beautifully in this environment. It treated properties like financial instruments with stable, bond-like returns.
But today? Those long leases are replaced with 2- to 5-year agreements as businesses prioritize flexibility. Hybrid work models have redefined office needs, and the rise of coworking and on-demand spaces has made demand for traditional offices anything but predictable. Add in tenants demanding modern, sustainable, and tech-ready spaces, and many older buildings are struggling to stay relevant, and will probably go out of business in the coming years. And let’s not even get started with management agreements.
One thing’s become clear over the years. Valuing an office building based on outdated assumptions of stable, long-term income is like flying blind. It completely ignores the market’s shift toward volatility and adaptability.
The Problem With Traditional Models
Methods like discounted cash flow (DCF) projections or cap rate analysis struggle to capture today’s market dynamics. These approaches assume steady income streams and market conditions, which simply aren’t the reality anymore. When a tenant leaves a flexible lease early, or when a building faces high turnover costs, those neatly crafted projections can quickly fall apart.
What’s missing is a more realistic lens—one that accounts for shorter leases, fluctuating vacancy rates, and the growing costs of maintaining a competitive property in an era of ESG requirements and tenant-driven design.
The New Reality: Valuing Flexibility
What should replace these outdated methods? Well, I won’t argue that I have the silver bullet. But we certainly need a modern, adaptable approach that reflects today’s CRE landscape. Consider:
• Scenario-Based Modeling: Instead of static predictions, valuations should consider multiple scenarios—best-case, worst-case, and everything in between.
• Risk-Weighted Returns: Properties must be assessed based on their ability to weather tenant turnover and market volatility.
• Flexibility Metrics: How easily can a building adapt to new tenant demands? Does it support coworking spaces? Is it ready for hybrid work? Flexibility is no longer a bonus; it’s a necessity.
• Data-Driven Insights: Real-time market data—like leasing trends, tenant preferences, and even foot traffic—can provide more accurate, responsive valuations. There’s lots of new tech in this area too, with case studies from other sectors such as retail too.
Evolving, Not Abandoning
Does this mean we should throw out the old methods entirely? Not necessarily. They still have value, particularly as benchmarks for comparison. But they need to evolve. By blending traditional approaches with modern metrics and real-time data, we can build a hybrid model that’s both reliable and forward-looking. And this is an approach I’m helping to push through our work at Factory.
The Bottom Line
Commercial real estate valuations need to reflect the world we live in—not the one we left behind. With shorter leases, unpredictable markets, and demanding tenants reshaping the industry, clinging to outdated methods risks overvaluing properties and misjudging risks. It’s time for a fresh approach.
Because in a market where change is the only constant, adaptability isn’t just a nice-to-have. It’s the foundation of value.
