Every office deck assumes a five year hold. Honest, or just the model?

The buildout point is the one I'd push on hardest. Second generation office space almost never fits the next tenant. You demo the offices someone else paid for, move the ductwork, redo the lighting, and if the suite has been dark two years you're touching the sprinkler heads too. On a half empty building that work doesn't happen once, it happens suite by suite for three years while you're also paying commissions. By the time the last suite is done, the sponsor is already thinking about the sale. A five year plan in office is really a three year construction plan with two years of collecting rent bolted on the end, and the model rarely shows it that way.

I'd take the five year, and I'll admit it's partly because I don't trust anyone's ten year view of office. The recovery thesis has a shelf life. Prime space tightening, spillover to the next tier, all of that is a story about the next few years. Nobody knows what a 1990s suburban building is worth in 2036 and I'd rather not find out with my money in it. Anchor, the thing I can't answer is your rollover point. If the exit buyer discounts for near-term rollover, then every five year hold is selling into the same problem it bought.

Any deal where the exit cap does most of the work isn't the boring version of anything. I'd rather own something where the rent covers the building and the sale is a bonus, and in office that pushes me toward the longer hold by default. The problem is a longer hold in office means more capex cycles and more rollover, so it isn't automatically safer. I voted for the long option anyway because I'd rather be wrong slowly.

Does the sponsor even control the hold, or does the fund documents' term decide it for everyone regardless of what makes sense for the building?

Wren asked the thing I was going to. On the leasing side, who is actually working the building in year seven of a ten year hold. Every office offering I've looked at names a leasing team up front, and then the sponsor's attention moves to whatever they bought last. A long hold only works if someone is still walking prospects through empty suites in year six with the same energy they had in year one, and I have no idea how a passive investor checks for that before writing a check.

Ten years on an older office building means the roof, probably a chiller or two, and depending on age the elevator controls. That's not a rounding error, that's real money on a building that might be worth less per foot than the equipment costs. I've been in mechanical rooms where the units were installed the year the building opened and everyone kept saying next year. If you're voting for the long hold, ask what's in the capital plan past year five, because most of these plans go quiet after the lease-up is done.

The hold question changes completely depending on what's under the building. If the land supports a different use and the zoning is friendly, a long hold is you waiting for the dirt to become worth more than the improvements, and the rent is just carry while you wait. If the parcel is a big surface lot in a place nobody wants to build, then you're holding a depreciating asset and time is working against you. Conversions to apartments happen where the floorplate and the location and the code cooperate, and that's a narrow set of buildings. Anchor, I'd want to know which of those two things I was buying before I picked a hold length. Zoning and conversion rules vary a lot by city and state, so that's a local question every time.

Management contracts are usually annual with easy termination, so the long hold risk there comes down to who ends up staffing it. I've seen buildings where the on-site manager knew every tenant's lease by heart and buildings where the tenants had never met anyone. On a ten year office hold that difference compounds, because renewals are where the money is saved and renewals get won by the person who answers the phone.

The hold isn't really chosen, it's financed. If the loan is five years with two extension options and the extensions have debt service coverage tests attached, then the business plan is five to seven years whether anyone likes it or not. When the lease-up runs late and the coverage test fails, the extension isn't there, and you're selling into whatever market exists on that date. That's the mechanism that ends most office holds. Anchor, I'd read the debt summary before the business plan, and confirm the actual terms in writing rather than trusting a bullet on a slide. Anyone extending a loan on a half leased office building today is looking at a very different conversation than the one the sponsor had at acquisition.

Adding to girder, leasing commissions get paid mostly up front while the rent arrives monthly for years. So the cash cost of filling a building lands hard in the first half of the hold and the benefit lands in the second half. A short hold pays the whole bill and hands the benefit to the buyer, priced or not. That timing alone made me vote long.

Weighted average lease term came up in girder's post, and writing out what it means helped, so in case someone else is behind too. It's the average of how much time is left on all the leases, weighted by how much space or rent each tenant represents, so one big tenant with eight years left counts far more than a small suite with one. What I still don't get is whether a long average is good. It sounds safe, but if those rents were signed in a much better market, aren't you just waiting for a step down.

Juniper, that's exactly the trap. Long lease term at above-market rent is a countdown, not a cushion. I've started sorting my list by one thing, whether the loan comes due before or after the largest lease expires. Deals where the loan matures first go in a separate pile and mostly stay there. It's a crude filter and it throws out some fine deals, but it catches the ones where nobody has a plan for the eighteen months when both things happen at once.

I run both exits on every office deal and the spread is usually embarrassing. Five year exit at a cap fifty basis points tighter than going in, versus ten year exit at the same cap you paid. Same building, same rents, and the returns are barely in the same neighborhood. That tells you the five year story is a bet on pricing rather than on the building.

The number I care about more than hold length is downtime between tenants. Sponsors keep using six to nine months on suites that have sat vacant for two years already. Move that to eighteen months and rerun it, and a lot of these plans stop working at any hold length. Same with the reserve. If the plan has a leasing reserve that runs out in year four and the rollover schedule shows a wave in year six, the hold length was decided by whoever sized the reserve.

Coming from small multifamily this whole thread reads like a scaled up version of turnover math. My worst unit costs six weeks and a few thousand dollars, and I have twelve of them so it averages out. In office one tenant leaving can be a third of the building and eighteen months of nothing while you spend money to get the next one. That concentration is why I keep not buying office, and it's also why I think the long hold is the only honest answer. You need enough years for the bad rollover and the good rollover to both happen.

I voted for exit when the rent roll is clean rather than a fixed term, which I know is the least practical option on the list. My reasoning is that a building with staggered leases and a decent average term sells to a wider set of buyers than one with a cliff coming, and the difference in price is bigger than a year or two of waiting costs. The obvious problem is that most passive positions don't let you wait. Someone else decides, and you find out afterward.

Quill, that's the part people underestimate. Fund life is a hard date. A ten year fund in year eight is a seller no matter what the building needs, and everyone across the table knows it. If you want the option to hold through a bad window, you either need a structure with extensions that actually get used or a single-asset deal with patient partners. I'd read the fund term and the extension provisions before I read anything about the property, and have a professional review the documents since the language differs a lot between sponsors.

In my markets office means a single tenant in a converted storefront or a small professional building, and the hold length is however long that one tenant stays. There's no rollover cycle to ride, there's one lease and then a question mark. So the poll doesn't quite fit what I look at. Anchor, if you're ever considering something at rural pricing, the whole analysis collapses into whether the tenant is a business the town needs, and the building is almost incidental.