Underwriting Office

Unfortunately, this is the current flaw of office. The TI/LC/Freerent are beating them up to the point where majority of the leases are no longer accretive.

Are you actively doing office deals??

The rent/cost paradigm for office is flawed. The current high-yield environment has led to office only working in the highest-rent submarkets.

I’ve underwritten 5 offices this week ranging from very negative NOI to probably just covering expenses. All are in one of the best submarkets in the USA in regards to peak office metrics.

I include a buffer lease that is now to the recovery period that includes below market rents and little to no TIs. After ~3 years, it reverts back to normal market.

Also typically do not include any new leases in the first year because the offices I’m underwriting have zero leasing activity.

Hope this helps.

There have been some deals in my market heavily discounted at $50 psf on 20% vacancy. The fund manager paid all cash and can afford to undercut the market and do $1.00 rent deals just to get occupancy. The play for this investment is a speculation that office will make a comeback in the near-term. The buyer also just listed it on the market for more than 2x the purchase price 1 month after buying...

Heavily discounted deals are scooped up by opportunists bullish on office. Too speculative to bother underwriting, but the deals are being done anyways.

I’m coming in around $100-250 PSf per asset in NYC . That’s how. Than the question becomes are your leasing assumptions realistic. The answer is always - no. I think office is incredibly hard to underwrite until we have better clarity on tenant demand. TI cost is what it is. Just need to underwrite it to a purchase price that makes sense. The economics are shit. But it doesn’t mean you can’t make money. 

Also. Based on broker conversations. The only office deals happening are usually unleveraged deals where a family office can buy at an amazing basis and hold until they knock the building down (great dirt) or office comes back. They have a 50 year horizon.