Image by LYCS Architecture from Unsplash.
There’s a lot of hesitancy in the office real estate sector these days. It’s hardly surprising: Leasing activity has been relatively down in the dumps since the pandemic, and many office assets even in gateway markets no longer seem like the safe bets they did just a handful of years ago.
That’s not to say office is bad news right now, but fewer investors appear to be specifically targeting the sector, instead focusing on red-hot asset classes — like industrial properties or multifamily communities — where returns seem more assured. That’s not the whole story by half, of course. Many office assets remain incredibly attractive, depending on location and where they fall on the quality spectrum, according to a recent JLL report.
If you own an office building, though, now is a great time to look into reducing your costs, given the uncertainties before the sector. And one of the best ways to lower your cash outflows is by refinancing your debt, whether it’s with a life company or a CMBS lender. But that’s not all: This article will examine some of the reasons why an office refinance could make a key difference in your investment portfolio’s returns.
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1. Grab Better Loan Terms
One of the most common reasons to refinance a loan is to take advantage of better terms. Just because interest rates are higher now than when you closed your previous loan doesn’t mean much if your loan has a variable rate. Similarly, perhaps your current loan’s term is ending in the next year or two. Who knows how much higher rates could climb in the meantime? Locking in a fixed-rate financing package now could offer major benefits in reducing your future costs.
2. Get More Manageable Payments
It isn’t just about interest rates, though. If you bought your office building when it was less healthy — say, it had subpar vacancy or needed significant capital improvements — your current financing will reflect the state of the property then, not now. By leveraging an office asset with stable, strong performance, you may be positioned to take advantage of longer loan terms and amortization schedules, which could translate into lower monthly debt service payments.
3. Free Up Capital
Maybe you’re interested in diversifying your portfolio by getting into the industrial property sector. Or maybe you want to access some extra capital to transform that boring, Class B office building into a modern, high-end work paradise. If you can secure a higher leverage cash-out refinance, that’s money in the bank for your next investment play.
4. Avoid End-of-Term Balloon Payments
Finally, many office loans come with huge payments at the end of their term. Known as balloon payments, they are the natural result of loans with longer amortization periods than terms. This is relatively common in commercial real estate finance, and unless you plan to sell the property prior to the payment coming due, it’s a great incentive to refinance. Not sure how much your balloon payment is for your current loan? Check out our free commercial mortgage calculator to estimate it.