Office Has Plenty of Liquidity, for the Right Deals

The capital markets have not halted office lending activity. For the right deals that meet a certain formula, there is actually plenty of liquidity available for office deals. This year, KBS refinanced two office properties totaling $498 million, illustrating the strong potential to tap into available capital on office properties.

The two assets include The Almaden, a three-building, 416,126-square-foot office park owned by KBS REIT III and located in San Jose, California, and Accenture Tower, a 40-story, 1.46-million-square-foot office tower owned by KBS REIT III and located in Chicago. KBS secured $123 million for the San Jose property and $375 million for the property in Chicago. The two deals each had a three-year initial term with two, one-year extensions options.

“The capital markets seem to have a lot of liquidity available to invest in the space,” Robert Durand, EVP of financing for KBS, tells GlobeSt.com. “That has been recovering throughout 2020, and I think it is accelerating here in early 2021. However, while there is a lot of capital to go in, that capital is being very selective about what it is investing in. Finding the right formula of property type, location, average lease maturity schedule and term are weighing significantly on deals. In a lot of cases, this includes which specific tenants are in the building and the credit risk associated with those tenants.”

These guidelines are particularly rigid in the office sector, especially compared to asset classes that proved to be more resilient in 2020, like multifamily and industrial. “The multifamily space and the industrial space be very well through 2020,” says Durand. “Pricing compressed significantly throughout 2020, and now into 2021 as well. Lenders really desire that credit risk profile for obvious reasons. They are less excited about office product particularly given a lot of the work-from-home trends and concerns about when people will go back into the office and what people’s space needs are going forward.”

Of course, even here, there are exceptions. Lenders remain bullish on strong locations and trophy assets that are best positioned to rebound following the pandemic. “Some strong locations, like in these transactions, are expected to do very well as the recovery happens in the second half of 2021,” says Durand. “KBS will benefit from that because most of our portfolio is in markets where there should be a fair amount of success. We are not particularly concentrated in some of the CBD areas. Aria Tower is the exception, but it is in such an iconic location, and everyone believes that CBDs will return in force as we get through the pandemic.”

While office has a turbulent year, it fared better than retail and hotel properties. “Office was spared a lot of the extremes last year, but there is still a cautious outlook. People think that a lot of lenders aren’t playing in office anymore, but really they are just being very cautious about where they play in office,” says Durand. “We expect to be back in office when things get back to normal.”