Waste Management Relocation Trashes Valuation Of Downtown Office Building, But Owner Says It's 'Business As Usual'
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The building at 1021 Main is valued at $51.2M, down 31.8% from its previous estimation of collated value in 2017, according to a report.
The depreciation is due to the building losing its anchor tenant, Waste Management, whose lease expires in two years. The company will consolidate its two existing offices at 1001 Fannin and 1021 Main and move into the new Capitol Tower Downtown.
Waste Management occupies more than 40% of the 609K SF building at 1021 Main, which backs a $100M securitized mortgage loan, according to Morningstar. The total debt is split into two notes: one for $60M and another for $40M.
The property has been on the Morningstar Watchlist since mid-2017 because of declining net cash flow and occupancy. The property is owned by Florida-based Accesso Partners, which is optimistic about the future of the building.
"We will soon be embarking on a substantial renovation of the building and are finalizing the details," Accesso Partners Director of Asset Management Michael Adams said. "We see this as an opportunity to offer prime repositioned space to the Houston market which, we believe, is clearly in recovery mode. Our view: business as usual ..."
Net cash flow tumbled 23.4% between 2015 and 2017 due to a drop in occupancy from 82.6% to 72% over that same period. Occupancy was reported at 67% in September, Morningstar said.
"Our valuation assumes that occupancy will ramp up to 80% submarket occupancy over five years after Waste Management’s 2020 departure," Morningstar Vice President Steve Jellinek wrote in the report. "Our analysis included a 1.5% growth rate for both revenue and expense due to the weaknesses recently seen in the Houston [market]."
The energy downturn has put a strain on Houston office. Though the market has shown signs of rebirth recently, Downtown has had some struggles, and Morningstar warned that the submarket may battle to generate enough office demand to fill the large vacancy at the property.
Vacancy in the downtown reached an all-time high of 22.8% in the fourth quarter, according to CBRE. Absorption has been negative since 2015. Trepp, a New York City-based CRE analytics company, is also keeping an eye on five office loans in special servicing.
Waste Management will occupy nine floors, or 284K SF, in Capitol Tower at 800 Capitol St. It was the largest lease signed in Downtown last year. The 35-story tower is expected to deliver in June. Other tenants include law firm Winston & Strawn and Bank of America.