By Blake Hering
There are few symbols that encapsulate human achievement like a city skyline, with its towering office buildings that reach for the sky. These shimmering structures were once the crown jewels of success for developers, investors, and lenders. But today? Well...
In our current environment, market perception of office has likely never been lower, particularly for the CBD (Central Business District). As buildings struggle to attract and retain occupants and as capital largely steers clear, the fate of office seems to momentarily hang in the balance. How will this trajectory change? How does an owner attract a lender to this property type?
Aside from medical office where investors and lenders will still vie willingly for a well-located and well-occupied building- particularly if in proximity to a hospital - defining what characteristics appeal to capital, particularly lenders, can be challenging. Here are a few must-haves and observations:
Leverage – if you’re seeking anything close to a full loan, think again. Lenders need meaningful enticement to make office loans in today’s environment. The more capital you’re able to contribute, the more likely you’ll be to find an agreeable lending partner. Think 50/50 as a starting point on leverage.
Location, Location, Location – a CBD location raises the bar to dizzying heights. Suburban locations near executive housing (strong demographics) are preferred. In either case, performance history, not just of the building itself, but the surrounding comp set will be vital. Lenders typically won’t apply a vacancy factor in their underwriting less than the building actual, or the surrounding submarket/comp set, whichever is greater.
Curb Appeal – we’re all human and a cool looking building just elicits greater motivation to be aligned with the allure, the cachet. Sexy buildings can’t overcome dismal metrics, but they can encourage a closer look. Keep your building looking fresh.
Sponsorship – three significant keys here: financial strength, operating/ownership experience, relationship. All lenders like to loan money to those who are already successful (and don’t seem to need it). Office property owners need deep pockets – ample reserves to weather the inevitable storms. Experience equates to a proven track record. A history of having faced and overcome the challenges of ownership. And relationships speak to the quality and character of the decision makers. Have those in charge been true to their word. These features need to be emphasized on your behalf.
Granular Rent Roll – a greater number of tenants helps diversify risk. Lenders often balk at ‘lumpy’ rent rolls that weight too much of a property’s performance on only a few tenants. Ideally, lenders like to see tenant diversity by business sector and lease maturity dates.
Recent Performance History – how a property has performed in the last few months and years tells a meaningful story. Is there market demand? Have spaces remained vacant for long periods of time? Have new leases been signed recently? Are lease rates trending up or down?
Parking – Many jurisdictions like to push for greater use of mass transit (and limit parking for new developments), but historically, properties with good access to safe, convenient parking tend to fare better over time. Someday that may change, but for now, there’s greater appeal to properties that offer customers the freedom and autonomy to drive when they choose to.
In today’s lending world, the decision to loan on a property is made by committee. It is not a matter of convincing one individual of the merits of a given opportunity – it’s a matter of overcoming headline risk and widespread perception. Loan committee and approval authority can be comprised of people removed from the day-to-day operations of commercial real estate.
As such, a lender will have to have a meaningful incentive to make an office loan in today’s market. Is this a borrower, an asset, or a location that aligns with a mission driven objective?
The job of a good intermediary is to highlight the desirable and help mitigate the objectionable.
I still remember my early visits to my dad’s office when I was young – the wonder of the drive into ‘downtown’, the scale of these huge structures, the ‘bat cave’ like entry to the subterranean parking garage, the thrill of an elevator ride, the big swivel chairs, the candy bowl, and playing on the telephone intercoms with my siblings. Office buildings still evoke a sense of awe. It’s only a matter of time before they’ll have their day back in the sun.