Quantifying optimal tenant lease-term strategies

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CBRE has issued a new research report, which highlights the optimal leasing outcomes for office buildings. But what is the definition of ‘optimal’ in an ever changing market?

The definition of ‘optimal’ is dependent on one’s required return and its composition, namely income and capital growth. Our modelling indicates there exists a trade-off between the two and that lease term is a contributing factor.

CBRE modelled over 70,000 scenarios using historical data from six capital city prime CBD office markets. The aim was to answer the following questions:

  • How do investment risks and returns change as buildings substitute tenants on longer leases for tenants with shorter leases?
  • What is the optimal mix of short and long-lease tenants within a building and what are the optimal lease terms for each category?

You can read CBRE’s full research here.