Richardson Office Complex Sees $39M CMBS Loan Transferred To Special Servicing

A $38.7M loan on a Class-A office property in Richardson has been transferred to a special servicer following the downsizing of the building’s largest tenant.

City Office REIT acquired Granite 190 Center, a 307K SF, two-building complex at the southwest corner of the President George Bush Turnpike and Waterview Parkway, for $41.3M in 2015, according to a filing with the Securities and Exchange Commission. 

The property has seen an uptick in vacancy over the past few years, with occupancy falling from 93% before the pandemic to 76% as of December, according to Morningstar. But the wound grew deeper when United Healthcare, a tenant at the property since 2008, entered into a short-term lease that reduced its 173K SF footprint by 60%.

That could cause occupancy to drop to 42% by midyear. Meanwhile, five of the property’s other largest tenants have leases that expire in 2023, per Morningstar.

City Office REIT didn't respond to Bisnow’s request for comment.

The property’s CMBS loan isn't scheduled to expire until 2025, but the threat of an imminent default could explain why the debt has been transferred to a special servicer, said Amber Sefert, managing director of credit and asset management at Trimont Real Estate Advisors. Sefert isn't affiliated with the loan.

“The borrower may have advised the lender that they do not have sufficient funds to make the loan payments after United Healthcare stops paying rent when their lease expires in June,” Sefert said in an email.

“Alternatively, the borrower could have asked for a reduced monthly loan payment based on the fact that their income will dramatically drop in June when United Healthcare leaves,” she added. “Either way, this will put the loan in payment default.”

Whether the borrower is granted a modification or extension will likely hinge on if it can guarantee the recovery of income by filling vacancies, Sefert said. Very few office tenants are leasing large swaths of space, which means a note of sale or foreclosure may be the best path to resolution, Sefert said.

“The time and effort to backfill all of this space will be costly and take a lot of time,” she wrote. “All reason for the current owner to not see a lot of upside to continuing to fund the operational and leasing costs for this building.”

Office-backed loans continue to be a major driver for commercial mortgage-backed securities distress. The overall CMBS delinquency rate jumped by 18 basis points to 3.12% in February, with office loan delinquencies rising 55 basis points, easily the biggest increase among property sectors, according to Trepp.

Class-A properties may be better poised to weather trouble in the economy, but Sefert said higher-tier properties aren't immune to distress. The fate of many office buildings will likely depend on how much stock tenants put into the value of physical space moving forward.

“In competitive markets, there is typically a flight to quality, hence ‘A’ buildings getting more of the views,” Sefert said. “Ultimately, I do think there could be some Class-A office failures, and it is also possible that some Class-C survives.”