I'm running some rough theoretical numbers on a deal for someone.
If I'm building a 100,000sf Class A/B office building, and all leases are modified gross, are expenses going to exceed ~30%? I don't work a lot on this size of an asset. A new apartment building could operate at ~35% expenses...wouldn't the office building being a lower ratio given the lease structure?
| +48 | Anyone else being pushed to underwrite more aggressively (Multifamily)? | 14 | 4d |
| +30 | Uncertain of what To Do Next | 5 | 1d |
| +28 | Capital Restricted Developer | 2 | 1d |
| +28 | What should we be buying? | 22 | 22m |
| +27 | Basis play / value-add office in high-growth markets - value trap or generational buy? | 10 | 3d |
| +22 | Warning: J. Shaw Recruiters | 5 | 1d |
| +18 | Due Diligence - ALTA Survey | 3 | 1d |
| +17 | Laughable Job Posting | 3 | 15h |
| +15 | Seeking Advice: How Do You Get Value from ULI Membership? | 2 | 4d |
| +11 | PGIM Real Estate Equity vs. Private Credit | 3 | 4d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Is it a brand new building? Hard to say without knowing what your market's typical Class A- rents are and PSF real estate taxes. In my east coast market I would say yes, because A- rents are say $50 gross and expenses are close to $23.
Yes, it's being built, so it's new.
Wow, so on full gross leases you're running 46% expenses plus vacancy? That seems high, no?
Office vacancy in the market of my subject property is under 10%. Cap rates average 6.4% regionally. I'm trying to get a rough NOI on this thing.
Rents on this deal appear to be $2.50 modified gross. There is a neighboring building with these lease rates. Also, there is a MOB at $2.25 NNN with .75ft in CAM, so $3 all in. I don't think we have the budget to build MOB, so, $2.5ft MG is what I'm looking at right now for lease rate.
Edit - $30ft MG annually
I'm not sure if ratio is the best way to analyze it, but who knows? I've got a Class B+ office building in the Washington, D.C. market, an older building (late 1960s build) that was gutted and rehabbed in 1998 with Class A tenant improvements/buildouts from 2014 to 2016. Our PSF operating expense is about $12.96 PSF with an expense ratio of 37.43% (when including parking rent and pass through revenue). Building is 83.67% occupied.
Take it for what it's worth as a single comp. I'd give you the rest of my buildings, but they are solid Class B-, at best, and not, in my view, comparable to a Class A building.
EDIT: another way to look at it: 161,102 sf office building; $37.75 PSF base rent across the whole building; $12.96 PSF operating expenses; 83.67% occupied. $37.75 x 83.67% = $31.59. $12.96 / 31.59 = 41%. Although you would need to add back parking rent and expense pass through revenue.
Do you have to give it as a percent estimate? If you break down the expenses, you'll get a far more accurate number.
Thanks for the responses guys. No, it doesn't have to be a percentage, but usually there are consistent patterns with each asset class depending on age, class and lease structure.
This PDF shows expenses more in the 34% to 45% range.
https://www.irem.org/File%20Library/IREM%20Store/Document%20Library/IES…
I wouldn't recommend underwriting an office BOE based on an opex ratio. Instead, you're better off applying a $/sf opex estimate. On most office deals of this size, I have seen opex NOT including real estate taxes come in between $8-12/sf depending on location, operator etc. For taxes you, should estimate the cost based on the location and the tax code there, which you can zero in on by looking at the rates and public records for comparable office buildings.
I would say if your deal pencils after applying the higher end of this $/sf range in addition to your estimated tax burden, then it's worth exploring further.
Velit quasi facilis est fuga odit cum. Aliquid error qui numquam omnis quia. Quae dolores nisi dolorem dicta aut quos nobis. Et neque inventore ut aut ut cupiditate. Ratione odit ut non quis. Suscipit dolorem distinctio autem provident eos.
Esse fuga reiciendis voluptate corrupti quis eligendi. Expedita dolores quo laboriosam vel velit. Nesciunt aliquam nostrum temporibus velit. Et nesciunt illo et modi minima. Ut velit quod enim saepe.
Quia dolorem corrupti qui eaque quis cumque. Consequatur culpa sed est ut. Est provident esse voluptatem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...