I am trying to get a sense of how increased vacancy would impact how buyers would price an office deal.
My thinking goes like this: A building that is 100% occupied has more certain future cash flows, thus less risk, resulting in a lower discount rate/acceptable return to buyers, thus buyers would pay more.
Now, say the building is 70% occupied. There is now more risk in future cash flows since you need to lease the remaining 30%, which would also be costly due to TI's etc. This would result in lower (or less certain) cash flows, thus more risk, requiring a higher discount rate/acceptable return, which means buyers will pay less.
Can folks tell me whether my thinking is correct here? I have heard some say that buyers may pay more due to the fact that a building with vacancy has more NOI growth potential. While I understand that higher growth in NOI would result in a lower cap rate (i.e. Grodon Growth Model), my thinking is that the required return/discount rate, would also be higher, offsetting the impact of a higher growth rate.