As economic uncertainty looms over the commercial property sector, a California-based real estate investment trust with office properties in North Texas has cautioned its investors about the potential for sweeping defaults heading into 2024.
With approximately $1.7 billion in commercial loans maturing in the next 12 months, KBS REIT III is one of many property owners at risk of default, The Dallas Morning News reported.
“Considering the current commercial real estate lending environment, this raises substantial doubt as to KBS REIT III’s ability to continue,” KBS told investors, per DMN.
If the real estate trust defaults on its loans, KBS says it will likely have to sell off one of its three North Texas office properties.
“The company may relinquish ownership of one or more secured properties to the mortgage lender,” said KBS. “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.”
In general, high interest rates have caused banks to significantly reduce lending over the last year, with the commercial and industrial real estate sectors seeing the biggest pullback.
According to the October 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), participants reported “tighter standards and weaker demand for commercial and industrial loans to firms of all sizes over the third quarter.”
Furthermore, the SLOOS noted that banks saw tighter standards and weaker demand for “all commercial real estate loan categories.”
Since September 2022, KBS said it has lost around $350 million in overall property value. Reasons for the trust’s increased risk of default and loss of property value stem from high borrowing costs and its ownership of properties in markets like San Francisco, where fewer employees are actually returning to the office.
“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,” said KBS, according to DMN. “These challenges have, in turn, had a discernible impact on the REIT’s ongoing cash flow.”
By contrast, the market in DFW has benefited from a greater percentage of workers returning to the office. As reported by The Dallas Express, the DFW metro ranked 7 out of 10 for “Best Metros for Office Jobs in 2023,” according to a new study by Yardi Kube.
For instance, KBS’s local holdings include the three-tower Preston Commons and Sterling Plaza office buildings in North Dallas, as well as the Legacy Town Center office complex in Plano, which are 90% and 70% leased, respectively.
Still, if KBS cannot pay its loans by maturity, one of the above office properties could be sold off to satisfy creditors.