How to underwrite an office deal
Worked on a 120,000 SF building that is 81.3% occupied. Office turns on one number the other asset classes barely think about: what it actually costs to replace a tenant.
A 120,000 SF building, worked
Sample inputs
- Gross leasable area
- 120,000 SF
- Occupancy
- 81.3%
- Base rent, annual
- $2,983,500
- WALT
- 3.46 years
- Market rent
- $32.00/SF
- Downtime assumption
- 9 months
- Free rent
- 6 months
- TI allowance
- $80.00/SF
Four tenants, one empty floor. Base rent looks healthy and the weighted average lease term is a respectable 3.46 years. Both of those figures are true and neither describes the deal.
| Suite | SF | Rate | Annual rent | Expires |
|---|---|---|---|---|
| Suite 200 | 20,000 | $31.00 | $620,000 | Jun 2027 |
| Suite 300 | 34,000 | $29.50 | $1,003,000 | Dec 2030 |
| Suite 400 | 18,500 | $33.00 | $610,500 | Sep 2028 |
| Suite 500 | 25,000 | $30.00 | $750,000 | Mar 2032 |
| Vacant | 22,500 | — | — | — |
1. WALT describes the part of the building that is working
3.46 years, computed across 97,500 leased square feet. The building has 120,000. WALT is silent about the other 22,500, because a vacant suite has no lease term to average.
That is correct behaviour and it is routinely over-read. On a struggling office building the empty space is the whole problem, and the one headline number most people quote is structurally incapable of mentioning it.
Read it with two figures beside it: how much of the building it covers — here 81.3% — and how much of the space is already holding over past expiry. Neither is in the average and both change what it means.
39.5% of the leased space rolls in the first two years
A 3.46-year average sounds like a building with time on it. The distribution says the opposite: two of the four leases expire inside the first two years of a normal hold.
- 20.5% in year one, 19% in year twoSuite 200 and Suite 400. Together they are nearly two-fifths of the leased area, both re-letting into the same market at the same time.
- Then a 34.9% peak in year fiveThe largest single roll in the hold, which is also the year most five-year loans mature. Worth checking those two dates against each other.
- Vacant space is excluded, deliberatelyIt has no lease to expire, so counting it would dilute every share shown and understate the concentration this exists to reveal.
Rollover by hold year
$620,000
$610,500
$1,003,000
$750,000
Shares of leased area. The 22,500 SF vacant suite is excluded — it has no lease to expire.
3. What it costs to replace one tenant
Suite 200 is 20,000 square feet and rolls first. Re-let it on ordinary current terms — nine months to find a tenant, six months free, seven-year term, $80 a foot of improvement allowance, 5% commission — and this is the whole cycle:
| Duration | Cash | |
|---|---|---|
| Downtime | 9 months | $0 collected |
| Free rent | 6 months | $0 collected |
| Paying term | 84 months | $4,480,000 collected |
| Tenant improvements | — | ($1,600,000) |
| Leasing commission, 5% | — | ($224,000) |
| Net over the 99-month cycle | — | $2,656,000 |
The cycle is 99 months, not 93 — the free rent sits on top of the paying term rather than inside it. Spread the $2,656,000 net across all 99 months and the suite produces $321,939 a year, or $16.10 per square foot.
The face rent is $32.00. The net effective rent is 49.7% lower.
Underwriting office at face rent is not an aggressive assumption. It is a different building.
$1,824,000 goes out before a dollar comes in
The improvement allowance and the commission are both spent around commencement. The tenant does not start paying until month sixteen of the cycle.
- More than two and a half years of face rent$1,824,000 against a $640,000 annual face rate — spent in a period when the suite is producing nothing at all.
- Fifteen months from expiry to first paymentNine months of downtime and six of free rent. An annual model shows a soft year; a monthly one shows a hole you have to fund.
- Now do it twiceTwo suites roll in the first two years. Both cycles overlap, and both draw on the same equity in the same months.
Re-leasing capital by hold year
$1,824,000 out
$1,687,200 out
$3,100,800 out
Sized on the same terms as Suite 200. The vacant 22,500 SF needs its own package on top.
What to check before you believe an office pro forma
- Is the rent face or net effective? If the model shows $32 and the market is giving six months free and $80 a foot, the model is not showing what you will collect.
- Is downtime modelled, and is it credible? Zero months between tenants is not an assumption, it is an omission.
- When does the TI actually get spent? Near commencement, in cash. An allowance amortised neatly across the term hides the funding requirement entirely.
- Does the vacant space carry a full lease-up package? Rent, downtime, free rent, improvements and commission — not a vacancy percentage.
- Does the biggest roll year collide with the loan maturity? Refinancing into a weaker rent roll is a different deal from the one on the page.
- What does WALT actually cover? The share of the building it is computed over, and whether anything is already holding over.
Questions people ask
What makes office harder to underwrite than other asset classes?
The cost of replacing a tenant. Office concession packages — downtime, free rent, and improvement allowances measured in tens of dollars per square foot — are large enough that re-leasing a suite can consume more than half the rent it then produces. Nothing in industrial or retail comes close.
What is net effective rent and why does it matter here?
The rent you actually receive once concessions and leasing costs are spread across the full cycle, including the months the space was empty. On the suite worked through below it is $16.10 against a $32.00 face rate. Underwriting office at face rent is not conservative or aggressive, it is wrong.
What downtime should I assume for office space?
Longer than feels comfortable, and specific to the submarket and the suite. What matters more than the exact figure is that downtime is modelled at all: it is the months of zero income between one tenant leaving and the next one starting to pay, and it sits before the free rent rather than instead of it.
How should I treat a tenant improvement allowance?
As cash going out near lease commencement, not as an annualised deduction. The timing is the risk. On this example $1,824,000 of TI and commission is spent before the new tenant pays a single dollar, fifteen months after the old one left.
Is WALT a useful measure for office?
Partly, and it is routinely over-read. It is computed across leased space only, so on a building that is 81.3% occupied it describes 81.3% of the asset and says nothing about the fifth that is empty — which on a struggling office building is usually the entire problem.
How do I underwrite vacant office space?
As a future lease with its full cost, not as a percentage haircut. Vacant space in office does not cost you rent, it costs you rent plus downtime plus free rent plus an improvement allowance plus a commission. Modelled as a lease-up it behaves nothing like a vacancy factor.
Keep reading
Net effective rent
The measure this page turns on, explained on its own.
WALT explained
What the average hides, and the two figures to read beside it.
TI amortization calculator
What an allowance costs over a term. Free, no signup.
Rollover & re-leasing
How the model handles it across a whole building.
Retail, worked
The other asset-class guide, with its own arithmetic.
Compare lease proposals
Normalise offers to net effective rent. Free tool.
Model what re-leasing actually costs.
Upload the leases and DealWise reads the expiry dates, then models each suite's re-leasing cycle month by month — downtime, free rent, improvements and commission, in the months they land. Free plan, no credit card.