Michael LaBelle: So this is Mike. I’ll respond to this and the rest of the team can add on. Lenders in general are not getting payoffs. So typically, they have volume requirements that are pretty significant because they’re constantly getting paid off and they need to replace and hopefully grow that. In this environment, their borrowers are not necessarily paying them off. So they’re not excited about increasing their exposure to commercial real estate and office properties right now. So I think as a whole, banks are not excited to provide lending, I think they would be more likely to blend on a stabilized piece of property at an appropriate debt yield than do a construction loan. I think there’s very little in the way of construction financing available out there, particular anything speculative.
If you came to a banking, you had a fully leased property maybe you could get that done. But again, the pricing is going to be, I don’t know, 300 to 400 over SOFR. So SOFR is at 5.3%. So you’re talking about 8% to 9% money. So it’s really, really hard to make sense of that when that is the case. So again, Doug talked about very little in the way of new construction going on. And I think the bank financing market is another limiting factor to that picture.
Owen Thomas: Yes. Just to add to that, on your question on development yields. So let’s divide this between office, life science versus residential. So on office, life science, our targets when rates were very low, we’re in the 6% to 7% range. And I’d say those have gone up at least 200 basis points. And as Mike described, it’s very difficult to get financing. And also, as I described in my remarks, the cost of development has gone up and part of those costs are the inflation that Doug described, but also a part of it is the yield requirements given higher rates. So that’s contributing. And then on the residential, the way we’ve always thought about it was 100 basis points over exit cap with no — with untrended rents. And so today, little hard to gauge, but there is some evidence of high-quality residential trading, say, in the mid-5s.
So I think in terms of development yields, you’re probably at least in the mid-6s on residential. And I — and for us, to engage in that. We need a joint venture partner as we have at Skymark, which is our development that’s going on right now in Reston.
Michael LaBelle: The other — just one other trend in bank financing, it’s important to note is there’s an upturning going on and there’s an analysis of profitability going on by these banks of their relationships. So if you have a broad relationship where you’re providing other kind of fee services and other things with these banks, and they can see a profitable relationship today and growing going forward, they’re going to be willing to provide capital where they’re not seeing that, they are exiting relationships. So that — again, that benefits us because we have a very broad set of relationships that we have, and we do these bond deals where these banks get fee income and things like this. And so we — the relationship profitability we have is acceptable.
So we are — we continue to have banks wanting to add to our stable on our financing. And you’ve seen that. I mean, last year, we added three or four new banks to our facility. We continue to have banks that are interested in looking at what we’re doing and are calling on us.
Owen Thomas: Mike, the additional information market that we wondered also is that as that just goes down their criteria for making a loan, of course, goes up. And the underwriting of the actual development firms that have a particular property has been incredibly closer and also the criteria for pre-leasing plus credit and the capital stack of equity. And it’s just not there right now. And they’re passing on everything that is in any way weak on the development front.
Operator: Thank you. And I show our next question comes from the line of Dylan Burzinski from Green Street. Please go ahead.
Dylan Burzinski: Hi guys. Thanks for taking the question. Just wanted to go back to tech leasing and some of the comments that you made in your prepared remarks on about a lot of these companies overcommitting to space during the pandemic and then being currently in a digestion process. I guess if we sort of weigh that with how much earnings have grown for a lot of these companies over the last several years versus the head count that has grown despite some of the layoffs that have gone on. I mean, how long do you expect this digestion process to last? Is this sort of a ’25 event, an 2026 event? I’m just curious how you guys are sort of thinking about that and maybe in your discussions with a lot of these tenants, what they’re telling you guys?
Owen Thomas: Short answer. I mean, you’re touching on a very key issue as it relates to the health of the office, the answer is we don’t really know. But I agree with what you said, our instinct is, yes, there was some over commitment. There’s some digestion. There’s some shedding going on, several tech companies have taken charges with sub lease space out in the market. That seems to have slowed down recently. But our instincts and what we’ve seen in past cycles is at some point, those companies are healthy. They’re in the center of all the innovation that’s going on in the nation. They’re going to — they have a bright future. They’re going to grow their earnings, and I think they will be back in the space market, but trying to figure out the exact timing of that is very challenging.
