Rethinking Office Underwriting

Two office buildings can sit a few blocks apart in the same market and represent almost opposite credit risks. The broader market is beginning to recover, but the recovery is selective: demand is concentrating in higher-quality, well-located buildings while headline vacancy rates still mask meaningful differences between properties.

One building may be well occupied, have meaningful lease term remaining and generate an attractive debt yield at acquisition. If the existing tenants stay, the business plan works without depending on substantial new net absorption. Another may have significant vacancy, near-term lease rollover and a capital plan that depends on attracting new tenants in a highly competitive market.

While both are considered an “office,” they are not the same risk. Consider two buildings in the same submarket: one offers modern amenities, transit access and a diversified tenant base, while the other has dated common areas, limited parking and a large block of space expiring within 24 months. Applying the same market vacancy rate and rent-growth assumptions to both would obscure the real credit distinction.

For a lender, the analysis starts with basis and in-place cash flow. We want to be comfortable with the purchase price, current occupancy, debt yield, lease rollover, tenant-improvement and leasing-commission needs, and required capital investment based on the property as it exists today. Future leasing should create upside, not be necessary to justify the original basis.

Additional loan proceeds can then be funded as “good-news money” after measurable leasing or performance milestones are achieved. That structure aligns new capital with demonstrated progress rather than asking the lender to fund an optimistic leasing plan on day one.

Good office underwriting goes beyond the numbers. The real estate must give tenants—and their employees—a reason to choose the building and remain there. A lender should ask not only whether the property can lease space, but why a tenant would choose this building over the alternatives available in the market.

Location is critical, and its value should be assessed through the tenant demand it can generate and sustain. Transportation, parking, hotels, dining, coffee shops, and other amenities influence how effectively a building can compete for tenants and retain them over time. These are not merely qualitative considerations; they help lenders evaluate leasing risk, cash-flow durability, and the credibility of the business plan.

Recent market performance illustrates why this matters. In Houston, overall office vacancy remained elevated in the second quarter of 2026, but Class A buildings accounted for more than 60% of leasing activity. The headline CBD vacancy rate also concealed a two-tier market: newer Class A properties were holding occupancy better, while older Class B and C buildings continued to weigh on the average.

Best-in-class real estate matters as well. Buildings that are difficult to replicate because of their location, design, amenities and surrounding environment should hold an advantage over commodity space. That differentiation can matter when tenants evaluate their options at renewal—and when a lender assesses the durability of future cash flow.

Employers also have a role. If companies believe collaboration, mentorship, and culture are improved by having people together, they should reduce the friction associated with office attendance. Ensuring easily accessible and low-cost transportation options, periodically providing lunch, making snacks readily available, offering some scheduling flexibility and even allowing a more relaxed dress code can make coming to work easier and more appealing.

These choices may sound operational rather than financial, but they affect the tenant’s willingness to renew. A financial-services firm competing for employees may value a building with a compelling lobby, convenient transit and shared meeting space even if the rent is not the lowest option. A professional-services firm may place greater value on client access, conference facilities and a cluster of complementary businesses nearby.

Landlords should think beyond traditional amenities as well. The best buildings can operate more like destinations and platforms for their tenants. Shared conference centers that include a 100-plus-person event room, smaller breakout rooms, cafés or food halls can give tenants access to facilities they could not efficiently create in their own suites. Tenants may even be able to lease less space while providing employees with more resources.

A landlord can take this further by intentionally building a tenant ecosystem. A major financial firm, for example, might attract law firms, accountants, consultants, technology companies and other businesses that benefit from proximity to one another. Healthcare, technology, and other industries can create similar clusters. Over time, tenants may gain customers, vendors, employees, and referral relationships simply by being part of the community. That makes the building harder to replicate and can strengthen retention.

For a lender, the question is whether these features are merely attractive or whether they create durable demand. A tenant ecosystem is more valuable when it is supported by a credible leasing strategy, realistic capital plan and evidence that tenants actually use the shared facilities and benefit from the relationships they create.

Historically, office underwriting has focused heavily on a tenant’s contractual obligation to pay rent. That remains essential. But lenders increasingly need to ask another question: Why will this tenant want to stay when its lease expires?

Answering that question requires looking beyond occupancy and rent. Does the building offer a location and experience the tenant’s employees value? Is the landlord’s capital plan credible? Can the property compete for new tenants without relying on optimistic assumptions? Are the building’s amenities and operating costs appropriate for the tenant base? The answers should inform the lender’s view of both current cash flow and future leasing risk.

The full credit picture lies in the combination of basis, existing occupancy, tenant quality, lease rollover, location, employee experience, capital needs and landlord strategy. The same market vacancy rate and interest rates may apply to two buildings a few blocks apart. The credit analysis should not.

A lender that starts with the real estate, tenancy, basis and business plan can distinguish between a compelling credit and one to avoid. That is the difference between underwriting “office” as an asset class and underwriting the building in front of you.

John Devereux is the President of Real Estate Finance. For more information on Forbright Bank’s Real Estate Finance, visit here.