Office Owners - What are you doing right now?
If any of you that work at firms that own a lot of office (and are leveraged), what does your day to day look like right now? LIterally just curious what firms like this are doing. Has to be a pretty frantic vibe in the office right now. I know a few firms like this that bought a ton of value add office in the past ten years, and looking through their portfolio right now, it looks pretty terrifying for them. CUrious what it is like to be on a team like that right now, and what the plan is. Not talking about the big mega funds, but more the mid size firms with small teams.
Not taking me out!
Doing the same thing everyone else is doing. Looking for new deals and trying to protect the portfolio. Refi. Leases. Recaps. Negotiating with lenders. More negotiating with lenders. Etc.
I work for a boutique firm that bought a lot of value add (Class B/C+) office pre-Covid and (post-Covid... like why?) and we're having to slash rates 30%, offer discounted promos, several months of free rent, $10+/SF in TI, and shorter lease terms. Even the tenant brokers are demanding an additional 1% to their commission. And of course we negotiate a little but since these brokers will just take the tenant to any of the 10 competing office buildings in the area if we don't, we ultimately pay.
And this is all just to keep your existing tenants. New deals are few and far between. Losing even 3% of your existing tenant base rings alarm bells because there's a overwhelming possibility that it won't get backfilled.
Meanwhile (since you specifically called out value add), our buildings are atrophying due to water damage and mechanical failures (HVAC and elevator). Utility and labor costs are rising.
Don't get me started on how difficult it is to refinance. You're giving an arm and a leg to refi out of a floating rate and into fixed rate. You're having to ask for an equity infusion just to keep the debt payments reasonable. Low net income + high debt service = a bleeding property.
Occupancy and a disciplined budget is the name of the game for us. That's the only way to keep head above water. Office blows, dude.
Edit: Oh - and if you want to know the day to day, at least for me, it's calling brokers and asking if they have any new deals, making sure our PM division is buttering up any tenants with upcoming expirations, and working with analysts to see if there are any cost cutting measures we can take.
My brother in christ, hang in there. Great insight, thanks. I guess just be glad it aint your equity.
Curious how those equity infusions are executed. Assuming you have a fund and it's not just the principals investing more of their own capital - are you just doing capital calls to existing investors? "hey buddy you know that bleeding asset you are invested in....do you want to invest more cash into it please?"
Or are you bringing in private equity cash infusions with awful terms?
We do have funds but these particular poor performing office properties are owned by a single HNW investor (luckily he has made a lot of money from his MF and retail). Conversation goes like this: "This property is a shit show because of X leasing market, Y capital improvements, and Z capital market. The only way to keep from realizing any losses is to inject cash at the property. We'll need a million bucks, okay?" This investor has extra cash, is more interested in cash flow, and probably still falls for the sunk cost fallacy. So we get the money and the property continues on. Since I see office only getting worse (potentially much worse) for the next few years, I wonder what this investor is betting on with these cash infusions. With so much equity poured in and not much appreciation potential, they're probably looking at a return rate less than that of a HYSA. Easier said than done to short sell, but like you said, thankfully not my money.
We have mid-rise creative office properties with nice build outs. Our leasing has actually held up just fine and luckily we have fixed rate debt for a few more years on most of it. Unfortunately it's really hard to see us making much money on any of them regardless of how well they are leased given how much cap rates have increased. I'm a believer that there are a bunch of great deals out there in office right now but I'd be very picky. We are seeing our physical occupancies increase steadily (meaning the groups we lease to are actually coming into the office and using their space more and more). Not saying that we can't go lower (especially on crappy/ugly high rise product in declining downtowns), but just think how everyone screaming that the world has changed and everyone is done for is usually when we are close to a bottom.
What has also been killing us is spec suite and TI build outs have become ridiculously expensive. We are completely blowing our acquisition budget on our CapEx even on deals we underwrote just 2 years ago.
There is no longer just a singular "office" world. There are dramatic differences in how they are performing based on vintage, location, high rise vs mid rise, etc.
Used to work at a small firm that had a one off, 80k spec office property that was 3 stories. Middle of nowhere in a major city but lackluster submarket. Leasing was doing terrible and I recently saw a podcast where one of the principals is like were selling, it's leased up and been a great asset but time to move on as if it's a good deal lol. He's probably getting killed on it and they had mezz on it pre interest rate increases and were basically at par on the overall value.
That makes sense. Our product is all very infill and great locations just not high-rise CBD but cap rates are still getting crushed
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