Underwriting Office
How the FUCK are you guys doing this? If 5 year terms are the new normal and everyone wants renewal TIs, how can you attribute ANY value to the office? You just get hammered from TI/LCs.
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??
Definitely not I'm doing BOVs (working on the brokerage side) and even in brokerage, it's absolutely impossible to make office look good lol. The only office that appears to have any legs are those with leases that have substantial term but 5 year terms seems like the new normal.
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.
Cool idea, thanks
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.
I assume that value range is for Class C product? There have been some recent sales that were significantly higher than that.
In the 200/SF range you're looking at conversion potentially being the highest and best use, although of course only so many of these conversations can take place, not everything permits residential as of right, and there are in place lease encumbrances.
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.
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