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One Westchase Center Borrower To Transition Property To Lender


A $47M floating-rate loan secured by One Westchase Center in West Houston has been transferred to special servicer LNR Partners, even though the loan is current. 

Ownership of the property appears to still be in the hands of the sponsor at securitization, Investcorp US Real Estate LLC. The company is seeking to transition the property to the lender due to pending maturity and the effects of the pandemic. Investcorp’s loan represents 11.5% of the collateral behind the CMBS issuance.

The property was valued at $85.2M in 2017, and the loan was current with the June payment, according to a market research note from global securities data provider Trepp.

Investcorp acquired One Westchase Center in April 2013, then tried without success to sell the property the following year.

Morningstar Senior Vice President, North American CMBS David Putro said the loan was structured with an initial two-year term and three one-year extension options in place. The first extension was executed in October 2019. The fully extended maturity date would have been October 2022.

Unlike the first extension, a second extension would have been subject to a debt-yield hurdle of 12.3%. When looking at figures for the end of 2019 onward, current cash flows are not close to meeting that level, Putro said.

At the end of 2019, the 466K SF building had an occupancy of 83%. On the whole, One Westchase Center has moderately sized leases, with the largest lease representing about 8% of the space, Trepp said. However, special servicer notes indicate the lease of one of the five largest tenants, MicroSeismic Inc., which occupied 30.3K SF, expired in March. Another top five tenant, Brown & Gay Engineers, has a 24.5K SF lease due to expire in February. 

Some of the leases in the building appear to be energy-related firms, according to the Trepp market note.

“With so many oil and gas companies filing for bankruptcy over the last three months, it's a concern for all CRE landlords right now with O&G tenants,” Trepp Senior Managing Director Manus Clancy said.

The weakness in the energy industry and wildly fluctuating oil prices are expected to weigh heavily on Houston’s office market for the near term.

In the case of One Westchase Center, it is likely a combination of several factors led to the borrower seeking to hand back the property.

“There's challenges on this property from multiple angles at this point,” Putro said. “Softer market, occupancy going backwards, cash flow going backwards, the debt-yield on top of all that. It's kind of the perfect storm.”

Putro also pointed to interruptions in the capital markets and the increased interest in remote work, which could also result in more office downsizing activity.

“My guess is, they looked at that entire scenario and opted to hand the property back to the trust or lender,” Putro added.

Houston’s overall office market vacancy averaged 22.3% in June, up 100 basis points from the same time last year, according to the latest monthly market snapshot report from NAI Partners.