Sara Havlena
Borrowers will see available capital for office, although lenders will continue to be extremely selective and cautious. Refinances and acquisition loans will be challenging for the foreseeable future. Lenders will seek financially strong borrowers and properties with stable operating histories and no near-term lease exposure. Office lending will remain tough for a while as many lenders are still dealing with problem loans. Even if the loans are performing well, there will still be issues if they are maturing soon. Count on asset-by-asset underwriting. Borrowers who are trying to get financing without bringing new cash to the deal will face some hurdles. It is going to be hard for owners to pay off their existing lender, even if the property is performing well. Stabilized assets will see leverage up to 50% to 60%. Rates will start in the mid-7% to 8% range. Lenders will target double-digit debt yield, although deals with lower leverage could be in the 9% range. DSC minimums will be 1.35x, although many deals need to be closer to 2.0x.
Watch for banks such as Goldman Sachs, Bank OZK, First Citizens Bank, First Utah Bank,
Axos Bank and Applied Bank to selectively look at office loans. Fidelity Bank will seek medical
office deals. Life companies such as StanCorp Mortgage Investors, Protective, Farm Bureau Insurance and Security National Commercial Capital will also be active. New York Life will
consider office, while TruStage will target medical office loans.
CMBS lenders such as Wells Fargo, Deutsche Bank, Barclays, Morgan Stanley, JP Morgan Chase, Goldman Sachs, UBS, Argentic, KeyBank, Natixis, Greystone and Basis Investment Group will be some of the most active lenders in the space. Borrowers will see 7.5%+ all-in rates. CMBS lenders will want a minimum of 12% to 14% debt yield. Leverage will max around 60%.
Borrowers will see even tighter underwriting. Lenders will be hyper-sensitive to the rent rolls and when leases mature. If a property is well leased, lenders will take a vacancy factor when underwriting — although in the current market, it is rare to see many office buildings over 80% leased. In the past, lenders relied on appraisals, but now they are having to come up with the property value on the front end. Lenders will not count any revenue from tenants that may have leases in place but are not utilizing the space.
Low-rise, garden-style suburban office has performed much better than the large high-rise corporate footprints in urban centers. Properties will need to exhibit a strong occupancy history, roll diversity and an experienced guarantor with liquidity. Lenders will seek deals in strong locations with updated technology and credit tenants or medical offices. Newer, small boutique buildings in a location with lots of amenities will also be targeted. Older, obsolete properties will be the toughest to finance.
The stronger the credit, the better, and buildings that have a big credit tenant with lots of lease term left will be the most sought after. Lenders are looking for tenants that have personal or corporate guarantees as a backstop to the lease to show a commitment to the term. Lenders are shying away from the tenants that do not provide guarantees to the lease or have a perception of “pulling back” from in-office work. Co-working tenants will be tough, as well as legal firms and any business that can operate remotely.
Count on gateway cities and coastal regions to weather the short-term storm better than the Midwest areas. Look for Miami, West Palm Beach, Fla., and Nashville, Tenn., to see plenty of capital. Properties in Sunbelt states that have growing populations will also be desired. Downtown locations in cities such as New York City, San Francisco, Chicago, Portland, Ore., and Los Angeles will not be targeted.
Only financially strong borrowers will be considered. Lenders will do a deep dive into a borrower’s full portfolio to be certain they do not have any near-term issues with other properties. Lenders like to see a net worth at least two times the loan amount and liquidity of 10% to 25%, post-closing. Experience is a must, and a sponsor with a proven track record with office ownership will see the most available capital. Lenders will look closely at the cash flow and loan maturities of other properties if the sponsor owns additional office buildings.
