Major North Texas office owner warns of potential defaults

Major North Texas office owner warns of potential defaults

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A California-based real estate investment trust that owns several North Texas properties is warning it may not be able to continue in business.

Newport Beach-based KBS Real Estate Investment Trust III has been a major player in North Texas office market for many years. The KBS real estate trust owns more than $1.2 billion in office properties in the central U.S. stretching from Texas to Minneapolis.

One of the largest ownership concentrations is in the Dallas area where the company has three large office properties.

The KBS trust is warning its shareholders that “considering the current commercial real estate lending environment, this raises substantial doubt as to KBS REIT III’s ability to continue as a going concern.”

Since September 2022, KBS says the value of its properties has fallen by almost $350 million.

The company’s office properties in the San Francisco market have suffered the most from delays in workers returning to the office following the pandemic, KBS said in a recent report to shareholders.

“The company has $1.7 billion in loan maturities in the next 12 months,” KBS said in the Dec. 15 report. “The company may relinquish ownership of one or more secured properties to the mortgage lender.

“Continued disruptions in the financial markets and economic uncertainty could adversely affect the company’s ability to implement its business strategy and continue as a going concern.”

KBS has owned the three Legacy Town Center office buildings in Plano for almost a decade.(KBS )

The KBS trust’s Dallas-area holdings include properties in some of North Texas’ top office districts. The investor owns the three-tower Preston Commons and Sterling Plaza office buildings in North Dallas’ Preston district, which are more than 90% leased.

KBS recently completed a multimillion-dollar renovation of the Sterling Plaza tower on Sherry Lane and has signed seven leases that bring the building to more than 90% occupancy. The company’s nearby Preston Commons buildings is 97% leased.

The three-building Legacy Town Center office complex the KBS REIT owns on the Dallas North Tollway in Plano was 70% leased in September.

The company’s overall U.S. office portfolio was 86% leased at the end of the most recent quarter.

“Texas is one of our strongest markets, as referenced in the buildings in your article leasing continues to be successful and we don’t anticipate that to change,” a KBS representative said in an email.

The KBS trust is just one of a growing number of office owners in a financial crunch because of low leasing activity and tough financing conditions. High mortgage rates and tougher lending standards have made it challenging for some investors to extend debt or refinance buildings.

More than 40% of U.S. office property loans are under water with more debt that current values and could be facing defaults, according to a recent report by the National Bureau of Economic Research.

“Assets in key markets, such as the San Francisco Bay area, continue to see substantial declines in both occupancy and leasing, precipitating a marked downturn in leasing activity,” the KBS REIT reports. “These challenges have, in turn, had a discernible impact on the REIT’s ongoing cash flow.”

The KBS REIT just renovated its Sterling Plaza office tower in Dallas’ Preston Center district.(DMN files. )

Updated with comment from KBS representative.

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