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The Challenges of Office Financing: Q&A with Walker & Dunlop’s Susan Mello
The office sector continues struggling due to increased sublease space, negative absorption and economic volatility. This is also creating more challenges in finding debt or equity to support office investment and/or new construction.
Connect CRE recently posed questions about office financing to Susan Mello, Walker & Dunlop Executive Vice President and Group Head, Capital Markets.
Connect CRE: How difficult has it been to obtain financing for office construction, refinancing and acquisition projects?
Susan Mello: Overall, office is the most challenging of the major property sectors to finance. In general, construction financing across all property sectors has been difficult to source as many lenders are required to increase capital reserves or have concentration risk. As office values have fallen, it will be more difficult to refinance existing debt. This means sponsors will likely have to inject more equity. Sales transactions in the office space are limited as pricing discovery continues; value-add office is pretty much dead.
Connect CRE: What do lenders want to see when they’re considering office financing?
Susan Mello: First, the rent roll— occupancy, credit, rental rates and increases, remaining term and so on. Also, a new thing post-pandemic is office utilization. For example, how often are existing tenants’ employees coming into the office? The lower the utilization, the more concern about how much space will be taken up (or given back) on renewal.
Second, the class of building is very important for attracting tenants. Most lenders today are more likely to finance a Class A over a Class B office building. Finally, location is also important. High-growth markets are most appealing to lenders.
Connect CRE: What advice can you give to sponsors that need capital for office projects?
Susan Mello: At this point, I believe most sponsors understand the headwinds facing the office sector, so they need to be very focused on their business plan. They should be conservative in their underwriting on leasing assumptions and they should understand the higher returns necessary to attract capital to their project.
Financing for office will be limited to the very best projects and sponsors. Additionally, proceeds will be lower and rates higher.
- ◦Sale/Acquisition
- ◦Development
- ◦Financing
- ◦Economy
