Ive been seeing this battle between WFH and RTO playing out. Part of me mainly believes RTO is only happening as companies have a lease in place, but I think that will change if we see companies not renewing leases.
For those of you in the space with investments in office, are you seeing companies not renew the lease, downgrade, etc. Or are companies just planning to keep the spaces going?
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Lots of vacates or at the very least downsizing. New tenants do not want to come out of pocket for any TI and are willing to trade for additional term. Not a lot of demand out there.
Someone mentioned in the office underwriting thread that the lease cost/rent paradigm doesn't make sense in today's environment and that is definitely the case. Very few new leases are accretive from an NPV perspective.
I'm curious to know if you guys jump on the chance to do ANY deal that is even minimally accretive? Obviously from an occupancy/loan covenant perspective, that deal would be a win. But are you ever turning down deals because they're net-neutral from a NPV standpoint?
Also, what do you look at when underwriting these office leasing deals? Is NPV your most useful metric? Are you also looking at the effects on short-term cash flow?
Finally, have you gotten to the point where you're throwing TI's, free rent, discounted rent, etc. at the tenant JUST to get additional term? In other words, are you hedging your bets AGAINST the future of office? Or are you comfortable doing, for ex., 1- and 2-year deals at market rent and minimal TI's/free rent instead of 5-year deals at 10-15% discounted rents and 2-3x the TI cost?
I agree with this.
You don’t have the residual value to save you anymore, since cap rates are now 10% as opposed to 4.5%. Feel like at some point, it’s going to become mainstream to just underwrite the CFs and place a very low reliance on any residual, which in a way is already being done with the extremely high cap rates.
I think Right now a lot of people are trying to thread the needle by providing concessions / negative NPV deals to keep occupancy, since it’s better than subsidizing the building. And it can be a quick spiral down.
On a tangent, I also feel like offices go obsolete way faster than other buildings, and it’s hard always be top of the market. There’s always going to be a new office building with better amenities and spots where the big names want to be. It’s like you’re always playing catch up with an office building, and by the time it’s built, it took 6 years to stabilize from the time it was designed, so it’s already on the way out. And then for these obsolete assets, land is worth more because you don’t have to demo it.
Just my food for thought
Got a mandate to acquire an office building (single or multi-tenant) that my shop will then move into as a tenant.
I'll just sum the takeaways from that as: It is a buyer's market, but 60-70% of the owners don't realize it yet and are still sitting on vacant space and not entertaining reasonable purchase offers. I can confidently renovate and market space competitively at a discount now, offers floated a few months back and shutdown are starting to come back around. (Top 30 MSA w/ high pop growth and office fundamentals)
On the asset management side, the demand contrast between real Class-A product and anything trying to make it as B+ is stark. Rent headwinds (obviously) + TI request tailwinds. I've hated office as a long-term cash flow investment long before COVID, the math just doesn't work with modern TIAs, and wouldn't even entertain the thought of buying w/o the owner-user benefits. There are plenty of bag holders that overpaid for assets with loan maturities coming up, I think it's going to be a soft market for the foreseeable future regardless of whether RTO optimism materializes.
Echoing views above but I think the downsizing might not work out within 2-3 years. Even with hybrid I think they're going to realize they need the space since no one likes Hotel desks.
TIs/ Free Rent is out of control
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