Office Underwriting in a Post-COVID Market

Office is the most contested asset class in REPE today. Remote and hybrid work permanently reduced demand for office space in many markets, pushing occupancy down, effective rents lower, and cap rates wider — while also creating distressed acquisition opportunities for sponsors willing to underwrite the uncertainty. REPE interviewers increasingly test office cases because they reveal whether candidates can adapt standard underwriting frameworks to a structurally challenged sector. This guide covers what's changed and how to model office correctly in the current environment.

What changed after COVID

| Metric | Pre-COVID (2019) | Post-COVID (2024–2026) | |--------|-------------------|----------------------| | National office occupancy | 85%–95% | 50%–70% (varies sharply by market) | | Effective rents | Growing 2%–4%/year | Flat to declining in most markets | | TI/LC costs | $40–$80/SF for new lease | $60–$120/SF (higher to attract tenants) | | Cap rates (Class A CBD) | 4.5%–5.5% | 6.0%–8.0%+ | | Lease terms | 7–10 years | 3–7 years (tenants want flexibility) | | Sublease availability | Minimal | Significant (tenant oversupply) | | Lender appetite | Strong | Selective; lower LTV, higher spreads |

The structural shift isn't temporary — hybrid work is embedded in most white-collar industries. Underwriting office as if occupancy will return to 2019 levels is the fastest way to lose credibility in an interview.

Office property classifications

| Class | Description | Typical Cap Range | Current Outlook | |-------|------------|-------------------|-----------------| | Trophy / Class A+ | Newest, best-located, premium amenities | 5.5%–7.0% | Resilient in top markets (NYC, SF, Boston) | | Class A | Modern, good location, standard amenities | 6.5%–8.0% | Mixed; flight to quality benefits best buildings | | Class B | Older, functional, secondary locations | 7.5%–9.5% | Most challenged; value-add or repositioning | | Class C | Obsolete, poor location, minimal amenities | 9.0%+ or distressed | Often special situations / redevelopment |

Flight to quality is the dominant theme: tenants that remain in office concentrate in the best buildings, leaving Class B/C with the highest vacancy. Underwrite Class B/C with extreme conservatism on occupancy and rent assumptions.

Revenue build: rent roll and occupancy

Office rent roll

Unlike multifamily (many small units), office rent rolls have fewer, larger tenants:

| Tenant | SF | Rent/SF | Annual Rent | Lease Expiry | Remaining Term | |--------|-----|---------|-------------|-------------|----------------| | Tenant A (anchor) | 50,000 | $45 | $2,250,000 | 2028 | 3 years | | Tenant B | 15,000 | $42 | $630,000 | 2026 | 1 year | | Tenant C | 10,000 | $48 | $480,000 | 2029 | 4 years | | Vacant | 25,000 | — | $0 | — | — | | Total | 100,000 | | $3,360,000 | | |

Physical occupancy: 75%. But effective occupancy may be lower due to sublease shadow space.

Sublease shadow space

Tenants who've reduced their footprint but haven't formally vacated may have sublease space on the market — space they're still paying for but trying to offload. This creates "shadow vacancy" that doesn't show in the rent roll but suppresses market rents.

Always ask: "Is any tenant marketing sublease space?" Shadow supply affects your market rent assumptions and re-leasing timeline for vacant space.

Market rent vs. in-place rent

Office markets post-COVID often show in-place rents above market — tenants locked into pre-COVID leases at rates the market no longer supports:

Loss-to-Lease = (In-Place Rent − Market Rent) ÷ Market Rent

A positive loss-to-lease (in-place above market) means renewals will be at lower rents — model explicit rent steps down at rollover, not flat renewal.

Expense build: gross vs. NNN

Office leases are typically full service gross or modified gross (landlord pays most expenses):

Operating Expenses (landlord-paid):
  Property Taxes:     15%–25% of EGI (major market-dependent item)
  Insurance:          2%–4%
  Utilities:          3%–6% (HVAC is significant for office)
  Repairs & Maintenance: 3%–5%
  Cleaning/Janitorial:  3%–5%
  Security:           1%–3%
  Management Fee:     3%–5%
  CAM/Operating:      Varies

Office expense ratios run 40%–55% of EGI — higher than industrial NNN, comparable to multifamily.

TI/LC reserves

Office TI/LC is the largest capital item below NOI and the most underestimated line in office models:

TI (Tenant Improvements): $60–$120/SF for new tenant buildout
LC (Leasing Commissions): 4%–6% of total lease value (rent × term)
Free Rent: 1–6 months common to attract tenants

Budget TI/LC for every lease expiration in the hold period — not just current vacancy. A 100K SF building with 30% rolling in the next 3 years needs $1.8M–$3.6M of TI/LC budget.

Underwriting frameworks by strategy

Core / stabilized office (rare post-COVID)

Only viable for trophy Class A in top markets with long-WALT, credit tenants:

• Underwrite on in-place rent roll with contractual escalations
• Conservative exit cap (+50 bps vs. entry minimum)
• Size debt on in-place DSCR (1.30x+ given sector risk)
• Minimal TI/LC if WALT exceeds hold period

Value-add office (repositioning)

Most common post-COVID strategy — buy Class B/C, renovate, re-tenant at market rents:

• Model vacancy and lease-up over 18–36 months
• Heavy TI/LC budget for new tenants
• Bridge financing during repositioning; refi to permanent at stabilization
• Exit on forward stabilized NOI at repositioned cap rate
• Stress-test: what if lease-up takes 12 months longer?

Distressed / special situations

See our distressed real estate guide — office is the largest distressed opportunity set post-COVID:

• Buy at deep discount to replacement cost
• Business plan: reposition, convert use (office to residential/life science), or hold for recovery
• All-equity or minimal leverage until business plan proves out
• Binary outcome: significant return or total loss

Key metrics for office interviews

"What's the current office market outlook?" Have a view. National occupancy ~55%–60%, but bifurcated: trophy Class A in gateway cities recovering; Class B/C in secondary markets structurally challenged. Hybrid work is permanent; don't underwrite return to 2019 occupancy.

"How do you underwrite TI/LC?" Budget for every lease expiration during the hold: TI at $60–$120/SF, LC at 4%–6% of lease value, plus free rent concessions. Spread costs over the re-leasing timeline, not as a single lump sum.

"What is shadow vacancy?" Tenants subleasing space they're still obligated to pay for. Doesn't appear in the rent roll as vacancy but suppresses market rents and extends lease-up timelines.

"Would you invest in office today?" Have a nuanced answer: "Not core office at pre-COVID cap rates. But distressed office at 30%–40% of replacement cost with a repositioning plan in a market with strong employment base — yes, with appropriate risk pricing."

Common modeling mistakes

• Assuming occupancy recovery to pre-COVID levels without justification
• Ignoring TI/LC for future lease expirations (only modeling current vacancy)
• Using pre-COVID comp cap rates for exit assumptions
• Carrying forward seller's property tax expense without reassessment
• Not modeling rent step-downs at renewal when in-place exceeds market

The takeaway

Office underwriting post-COVID requires honest occupancy assumptions, heavy TI/LC budgeting, and explicit rollover modeling — not the simplified cap rate math that works for stabilized multifamily. Interviewers test whether you understand the structural shift and can build a credible business plan under current market conditions. Show conservative assumptions, stress-test rollover, and have a view on which office submarkets and quality tiers still work — that's what separates informed candidates from those still running 2019 playbooks.