Today’s headlines may cause you to think that office transactions have quietly dropped off the radar screen for lenders. But as multifamily activity slows, office is once again on the rise. Over the last five years according to RCA, multifamily transactions averaged $136 billion and office a close $131 billion annually.
For NorthMarq Capital, office has consistently been our number two lending product and we are seeing strong activity in 2018. Both borrowers and lenders have a substantial appetite to finance office properties for acquisitions, renovations, refinancing and even new construction. Yet office financing that exists today is far different from the “go go” years that existed pre-recession.
During 2005, 2006 and 2007, office was a high-demand property type for lenders, and it represented a huge chunk of the transactions getting done in the CMBS market. Now the sector has experienced a financing evolution with loans that are much more structured to the particular situation.
For example, NorthMarq’s Minneapolis office recently worked with a client who was looking for a $35 million, 10-year office loan on a CBD multi-tenant office property with an expiring lease for half of the 300,000 square-foot building in year six. The original request was for “no structure” due to the pending lease maturity. In this case, “no structure” meant no recourse, escrow or master lease. Options included a shorter-term loan with a debt fund at a floating rate and a higher spread; a CMBS lender offering a higher leverage loan, with some holdback structure due to the leasing risk; or a life company, which would require a bigger equity commitment.
In this case, the borrower didn’t want the higher rate or the cash reserve structure so the life company provided a $30 million loan at 55% LTV with no reserve. The lender also built in a flexible, one-time pre-payment option to coincide with when the major tenant was set to roll. Essentially, they created an easy inflection point for the client to refinance, sell the property or extract cash for a required tenant improvement. The life company had the ability to structure that flexibility into the loan at a slight pricing premium.
So Who’s Active?
Getting office deals done in 2018 means matching the right structure with the right lender. Some opportunistic lenders are more “creative” in deal structure or are willing to take on more risk and charge a premium for that creativity. Other lenders are willing to offer a lower spread and flexibility, but they may demand more equity.
- Banks are known for doing shorter-term, flexible loans often with recourse.
- The CMBS niche is primarily 10-year money at moderate spreads with leverage that will go to 70%. This is lower leverage than prior to the “great” recession.
- Life companies have been a steady source of capital both pre- and post-recession, but are suited for low-leverage, longer-term loans.
- Debt funds fill gaps left by other lenders including construction loans. Office construction now requires a significantly higher pre-leasing commitment but when that is achieved, debt funds provide fuller leverage than banks.
- Bridge lending through debt funds is providing short- term, aggressive money for transitional assets. These are flexible, non-recourse loans for a pricing premium over banks and are a growing share of our business.
Certainly, there are office deals that are tough to finance even across the myriad of options available today. All lenders are more sensitive to risk, and projects that have more of a story or are repositioning fall into a higher risk bucket.
But capital is available, and it continues to be a very robust market for office transactions.Download PDF