Debt Tied To Iconic Harwood Center Lands On DBRS Watch List After Risk Of Default
The two loans, with balances of $57.1M and $28.6M, have a total unpaid principal balance of $85.7M.
The loans faced an imminent risk of default in May, but pulled out of it when all debt service payments reached “current” status by the July remittance date, DBRS reported in its latest loan summary.
“The Harwood Center borrower requested a transfer of the loan to the special servicer in April so that a program to fund building upgrades and leasing costs could be implemented,” a spokesperson for the building told Bisnow. “The borrower and special servicer are currently working together and the borrower expects a resolution before year-end.”
Even still, DBRS Morningstar continues to watch Harwood Center's cash flow with office tenancy in Downtown Dallas on the wane during the coronavirus pandemic and some tenants giving up large swaths of urban office tower space.
“While the property has historically operated north of 90% occupancy, the precipitous drop to 69% returns it roughly to market levels,” DBRS Morningstar said in its report. “The prospect of re-leasing this property to historic levels while a significant amount of square footage is becoming available in the submarket would be daunting in a normal environment; doing so against the backdrop of changing office dynamics resulting from the COVID-19 pandemic may prove to be impossible.”
The building owner, Fortis Property Group, renewed its largest tenant, Omnicom Group, in December.
Omnicom still struck a blow to the building’s cash flow, with the tenant dropping its overall leased square footage from 335K SF to 178K SF. The building owner partially offset this loss when Jacobs Engineering expanded its own leased space from 80K SF to 120K, DBRS Morningstar said.
Other concerns arose in late spring with special servicer notes showing growing concern about the debtor’s ability to support tenant improvement obligations, DBRS Morningstar noted. At the same time, the firm reported the existence of $5.1M in available tenant reserves.
A third tenant, the General Services Administration (the Department of Education) occupies 62K SF inside the building and has a lease expiring this month.
GSA, Omnicom and Jacobs Engineering previously represented roughly 65.9% of the net rental area at the property, but are now only 49.8% of NRA, DBRS Morningstar noted.
“This would fall to 41.3% if the GSA expires and does not renew its lease in September. DBRS Morningstar will continue to monitor this loan as re-leasing the vacated space in a market that typically has a high vacancy rate may prove to be quite difficult,” DBRS Morningstar wrote.
The property has a vacancy rate of 30%, which is in line with the rest of the Dallas Central Business District, the rating agency said.
“Although the submarket vacancy is relatively high, the borrower does have more than $5.1M in reserves for leasing efforts per the most recent servicing report from July 2020. Although the submarket may not be able to support significant lease up at the subject, the sponsor and borrower do have the capital to support strong leasing efforts,” DBRS Morningstar wrote.