How to analyze office buildings

[Runum]

Hi guys. I am still working on lining things up for the next level of my residential rental units- apartments. I have been reading and learning about the value play and planning on the implementation of that strategy. I was talking with an associate the other day and they mentioned some of the benefits of being the property owner of office buildings. So it got me to thinking, how does one go about determining a good deal from a bad deal in office buildings? Thanks and good luck to all.:cheers:

Greg

 

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[SteveO]

There are a lot of similarities. There are also more issues that can boost or bite the bottom line.

Predicting where business wants to locate or getting in during the early phase of a business boom will may take you a long way.

The national economy will play a major role in office occupancy. Real estate and mortgage businesses have been shutting down recently and some may not open up again. This is leaving a bit of a void.

You want to find a building that is leased at low rental rates. Hopefully, the market will be favorable for you to raise them when the renewal comes up. The risk here is that you may lose a tenant. The next one may not move in for months or years.

Lease negotiations must be done by professionals in the business. The tenants will be working to get the best lease and favorable tenant improvements.

Buildings can become functionally obsolete. Parking, wiring, layouts, asthetics may be important to the end user.

 

[Stevenh]

Like SteveO said, the big thing you want to look for in an office deal is the potential to grow your NOI as much and as quickly as possible and the most common way to do this is through leasing. The most effective way is to fill any vacancies in the building, but you should also look for tenants paying below market rents that you can increase when their lease expires. Be sure to underwrite extra downtime if you are hoping for big bumps as there is chance you will be looking for a new tenant to fill the space. When negotiating contracts you ALWAYS want to incorporate contractual rent increases into the contract even if it means you have to take a lower rent up front. Like I said, NOI growth is the key in these deals and this will gurantee revenue from these tenants will be growing even if the market is declining. If you can position yourself in a market with decreasing cap rates and acheive moderate to strong NOI growth you pretty much have yourself a guranteed home run.