What type of suburban office assets are most popular with tenants and investors?
At this point it’s no secret that the broader investment community has, after shunning suburban office for the better part of the decade, ultimately come around to appreciate the fundamental demand supporting the asset class. It was already headed that direction pre-Covid, but the current environment will likely play a role in providing the narrative backdrop to allow more capital to flow into suburban assets going forward.
In particular, the focus is, or should be, concentrated on those properties situated in “suburban-urban” (also called “middle neighborhoods” or “surban”) locations. These are office assets accessible to suburban residential communities while being proximate to retail, restaurant and entertainment amenities. The office space itself must also be rather modernized as the workplace is more than just a place to produce and create, it is also a marketing and retention tool in a competitive labor environment.
Still, the new equilibrium for office demand in a post-Covid world is unclear, so it’s safe to say that while the top tier properties are likely to outperform, it gets murkier as you move down the spectrum.
What type of financing is available for suburban office assets. What terms are lenders willing to do?
Like most lending today, financing for suburban office assets is a case of haves and have-nots. This is especially true as you move out beyond primary market MSAs (Metro Statistical Areas). A top flight suburban property, or a property with a rent roll supported by significant term and credit is going to achieve top flight lending.
Balance sheet and CMBS (Commercial Mortgage Backed Securities) lenders are aggressively quoting on the best properties, with financing at approximately 60-65% LTV (Loan-to-Value) in the 3-3.5% range (today). Bridge lending is also readily available both from banks and debt funds. The quality of the lender/loan does drop off pretty quickly depending on the asset quality and location.
How much of an increase in suburban leasing occurred in 3Q20?
Leasing is still generally very sluggish, I think it’s going to be hard to look to the leasing statistics for any real indications for another quarter or two.
Are you seeing an increase in suburban sales, and if so, how much are in which markets?
The investment sales market is also fairly spotty with the exception of high quality suburban office properties with term and credit. Those are trading at historically low cap rates given that they are more sensitive to rates than the current fundamental market. Beyond that, it seems like it’s going to take a bit of time to determine where the flows are headed.
Mr. Karsh is CEO and Co-Founder of Streitwise and Tryperion Holdings.
Prior to forming Streitwise, Mr. Karsh was an Acquisitions Analyst for Canyon Capital Realty Advisors and the Canyon-Johnson Urban Funds, where he was responsible for underwriting, structuring and executing value-add and opportunistic transactions. He holds a Bachelor of Arts degree in Political Science from the University of Pennsylvania. Mr. Karsh is a member of ULI and is also a Real Estate & Construction member of the Jewish Federation of Greater Los Angeles.