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Office Buildings Get High Fives from the Capital Markets


Chicago, IL, September 10, 2006 - All across the country, owners, appraisers and leasing agents are reporting improved economics with office buildings. For most of this decade, office buildings were depressed and often ignored by mainstream lenders. Now that the word is out about lower vacancies, minimum concessions and rising rents, everyone’s taking note - especially the realty capital markets. Most important of all, new office building construction levels are very low, indicating a balance between supply and demand.

Interest rates started declining since August 15, when the Fed announced rates will remain in place, after a two-year climb. Mortgage spreads have also declined, creating a ’perfect storm’ for lower index rates combined with narrower yield requirements.

Based on a 9/8/06 market close (4.77% 10-year treasury), interest rates for office buildings are within the following ranges:

1) Best Pricing - Class A/Low Leverage of 65% LTV or below: 5.5% to 5.75% includes larger loans of $20 million or more. 10-year term with interest-only or 30-year amortization readily available. Major markets only.
2) Better Pricing - Class A/Full Leverage of 75-80% LTV: 5.75% to 5.95%, smaller loans as low as $10 million qualify.
3) Standard Pricing - Class B/Variable Leverage of 80% or less: 5.95% to 6.75%, covering a wide-range of quality and occupancy profiles. Smaller properties in secondary markets acceptable within this pricing range. Amortization generally 25-years or less.

The above rate ranges are very comparable to other commercial and income properties including apartments and retail. At most, the office sector represents a 5-to-15-basis-point premium which is favorable by historic standards.

Should borrowers select shorter terms, pricing premiums of up to 20 basis points are assessed as lenders favor the longer-end of the inverted yield curve. [Such pricing is counterintuitive to traditional underwriting models - usually shorter term means lower rates.]

The Real Estate Capital Institute’s research director, Nat Zvislo, states “The fundamentals for the office-building sector are ripe for capital markets. Office buildings are recovering smoothly and steadily.”

The Institute tracks mortgage spreads for office properties. Daily reports available via the Real Estate Capital Scoreboard ™ at For more frequent (hourly) broadcasts throughout the day, call the Real Estate Capital Rateline ™ at 7RE-CAPITAL (773-227-4825).



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