CREFW-Winter2016

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Winter issue 2016 sponsored by CRE Finance World Winter 2016
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to the levels seen in other suburban markets. I think a lot of that
is fear of the overhang you highlighted; every day you pick up
another article that RBS is leaving, UBS is leaving. Some of the
stuff like the UBS space really isn’t competitive with what we have,
right? Our average tenant is 5,000 sf to 6,000 sf. We’re not worried
about competing against the 50,000 sf trading floor that UBS
might have. In the end, it is a market-by-market analysis. Some
suburban markets have come roaring back as property investors
say they can’t get enough yield in New York City, so let me go to
XYZ suburban market. I don’t think it’s come back quite to 2007
and it certainly is differentiated by market.
Michael Lascher: We haven’t bought many suburban office assets
in the last couple of years. Yet, there are suburban markets that
are doing better than others.
We’ve invested most recently in New York City and Chicago to
capitalize on this fundamental shift.
Lisa Pendergast: Victor, you noted that most of your assets were
on the West Coast. I was startled recently by the new develop-
ment of creative space both in the Bay Area and in Los Angeles.
Are tenants in northern California migrating to Los Angeles due
to the more attractive rents in LA?
Victor Coleman: No, what we’re seeing is, interestingly enough,
not a migration coming out of the Bay area to L.A. on any material
aspect, it’s really an expansion. And it’s primarily an expansion
around media and tech-related companies with more media exposure.
To give you an example, there’s no reason why YouTube or Netflix
need to have production space in (L.A.) when they already have
the presence up in San Francisco. Yet, Netflix took 200,000 sf,
YouTube took 300,000 sf, and why…the answer is that we’re talking
about content. They need to be in southern California where they
are creating content. So that’s Hulu and that’s HBO and Showtime
who had already been doing that; that’s Amazon who is now doing
that. So you’re seeing that shift to southern California, which is an
expansion around media.
CMBS Versus Balance-Sheet Lenders — Is There a Preference?
Lisa Pendergast: For any given deal, do you know in advance
what’s better suited for the CMBS market or for a portfolio
lender such as a life company?
Mark Weiss: Outside of CMBS, we also utilize the community banks
and the regional banks for debt capital. They all want to participate.
Whom we use depends on size. If we’re doing a $1 billion deal, we’re
limited as to who can lend into that. Most of our deals are between
$75 million and $200 million, which leaves a lot of access to the
debt markets. From a lending perspective, I think it’s incredibly strong.
We tend to focus a lot on the structural elements of a financing
because there’s always tenant improvements and leasing commissions
in an office building. It’s a very capital-intensive business. We focus
on trying to do the best we can do in terms of holdbacks and other
things. I think the CMBS market has gotten relatively loose from
that perspective.
Mark Lascher: I feel
the same way. It’s
very helpful if we
are able to figure
out how to structure
a financing so that
we’re not loading it
up from day one with
every dollar of tenant improvement or CapEx that’s required. I think
there is still a decent amount of structure required in the CMBS
world and lending generally. The one thing, hands down, that we’ve
not seen lenders move away from are cash traps that trigger if your
debt yield declines significantly. This is very different from the last
cycle when some property owners were stripping cash from assets
for four years and then handing back the keys at the end of the term.
Having your cash locked up with the lender allows you to focus on
operating the asset or at least having the discussion earlier.
Victor Coleman: For us, it’s really is a relationship play with lenders.
Our decision falls into two categories. The first is the documentation
and our comfort level with the documentation. The second is the
ease of use of continually doing deals with guys you’ve already done
deals with; again it’s really a relationship with lenders regardless
of the lender type. I think the demands by lenders are a lot more
specific today; there is a lot more vetting of the loan’s merits —
whether it’s a CMBS loan or conventional loan. I believe that the
process was a lot smoother in the past. That said, because of the
size of our company, our strong balance sheet (we’re a $7-+ billion
company), and good standing as a borrower, we can push back
a little bit on certain loan structures, cash-management features
and TIs/LCs, etc. Since we’re operators and hands-on operators,
I think the most challenging is lease approvals, or the time it takes
to get major lease approvals done. We act quickly so we want to
get our leases signed and transact with the tenant as quickly as
possible. It is often that lease approval language that tends to be
the biggest sticking point when dealing with CMBS lenders.
A Roundtable: Straight Talk from Industry Leading Borrowers
“The increased demand for
CBD office has much to do
with the renewed urbanization
that has people wanting to
work and live in city centers.”