The ‘Avalanche Of Loan Maturities’ Coming For Houston’s Office Market Could Benefit Opportunists

Securing financing for an office building in Houston is next to impossible given current market conditions, but some say an impending tsunami of loan defaults could turn into a wave of opportunities.

High interest rates, greater loan-to-value ratios, extensive tenant expectations and hybrid work trends continue to have an unfavorable impact on Houston’s office market, panelists said at Bisnow’s Houston Office Update event at Lyric Tower on Wednesday. Yet today's pain could be tomorrow's gain.

“The financing market is absolutely horrendous right now,” LXG partner Jamail Virani said. “Last year, you saw an environment where rates were low. However, there was just so much uncertainty going on in the market where it was very difficult to get lenders to bite onto an office deal. … Since then, we’ve seen rates obviously double.” 

Until 2020, it was normal for office owners to procure a 70% LTV loan with a 3% or 4% interest rate, RH Interests principal and founder Rudy Hubbard said. Now, many of those loans are coming due, and lenders aren't willing to renew them.

“If they do, they're only willing to go maybe 50% loan-to-value, not 70%. And the interest rate has gone up to two and a half times greater than it was,” Hubbard said. “Office building financing is virtually dried up.”

Some are getting creative to make financing work, he said. BlackRock owns Sage Plaza, a 531K SF office building at 5151 San Felipe St., and is providing seller financing to facilitate a sale, he said.

“So that shows you the lengths that many are going to,” Hubbard said. “I think we're going to find an avalanche of loan maturities coming down.” 

When a lender isn't willing to renew loans, owners are faced with a choice of writing a large check to reduce the loan amount or giving the keys back to the lender, Hubbard said.

The highest-profile national example might be Brookfield, the owner of major Houston office assets including Houston Center and Allen Center, handing over the keys to hundreds of millions of dollars worth of office buildings on the West Coast in recent months, he said. In Houston, a 588K SF Energy Corridor office building is slated to be sold at a foreclosure auction next month. 

“It's happening to everyone,” Hubbard said. “It's not just a poor operator or an operator that should not be doing this. It's happening to the best of the best.” 

But there is light at the end of the tunnel, he said, adding he anticipates a slew of opportunities coming to market by year's end.

“And everyone anticipates that financing will become a little more reasonable at that time as well,” he said.

When it comes to leasing, the flight-to-quality trend is still prevalent, meaning professionals are demanding concierge-type services and other perks from their workspaces, Lee & Associates Managing Principal Chris Lewis said.

Tenants, even large companies, want space to be ready within 30 to 60 days, he said, adding that they also want flexible terms. 

“So if you have all of that, then you can lease space,” Lewis said, getting a laugh from the crowd.

All parties are being more careful about leasing office space, Savills Corporate Managing Director Lesa Nickelson French said.

Clients are asking landlords to escrow their tenant allowance to ensure they get it, and brokers are asking for offset rights for rent in case they don’t get paid, she said.

“I even have a law firm wanting to look at the financials of the landlord, which has never happened in 18 years,” she said. “So it’s really interesting to see how people are trying to protect themselves because of what’s happening with the keys being handed back in many cases.” 

Houston has helped itself in recent years by attracting a variety of office tenants, Virani said. The city has spent the last decade diversifying its formerly oil-and-gas-heavy employer base.

“You're now seeing that with large companies moving to other cities in Texas, but also that bleeds over into Houston,” Virani said. “When that bleeds over into Houston, you have a ton of young professionals moving here, which draws more companies and more attractions here.”

Hubbard added that he has been through multiple recessions in Houston, and there are always silver linings, regardless of broader fundamentals.

“It's just a challenge out there,” Hubbard said. “But there are going to be a lot more opportunities as time goes on. So I suggest that everyone just try to weather the storm. Things will get better.”