Office

Overview

Suburban office, urban towers, occasionally medical-adjacent professional space. Office DSTs have largely disappeared from the new offering pipeline because of work-from-home, but legacy deals are still in portfolios and a few new ones do come out, usually single-tenant credit deals with very long leases.

Analyst Notes

Be very cautious here. Even attractive-looking office DSTs carry tail risk that's difficult to underwrite. If you're going to consider one, lease term remaining is everything. You want most of your hold covered by an existing lease with a credit tenant. Beyond that, look at functional differentiation. Is this building genuinely better than the commodity competition, or is it just another Class B suburban building? Cheap basis can save a deal, but cheap basis on a building nobody wants is still a bad deal.

Advantages

• Long-term, single-tenant credit deals with NNN structures can produce very stable income, similar to net-lease retail.

• Pricing has reset hard, so newer offerings come in at much lower bases than would have been possible three or four years ago.

• Trophy Class A buildings in select markets still attract tenants and capital, and the quality bifurcation has actually helped the best buildings.

Disadvantages

• Demand is structurally lower because of remote and hybrid work, and that change appears permanent.

• Re-tenanting costs are huge. Tenant improvements, leasing commissions, and free rent can easily eat two or three years of cash flow when a lease rolls.

• Lender appetite for office is poor, which makes refinancing risk significant for any deal that needs to extend or replace debt.

Frequently Asked Questions (FAQ)

Property Type Performance Averages