Washington Property Co. Defaults On $35M Silver Spring Office Loan
Bethesda-based development firm Washington Property Co. has defaulted on its loan tied to a 14-story Silver Spring office building, the latest in a series of distressed situations in the region's office market.
The developer failed to pay off its $35M loan on the building ahead of a July 11 maturity date, and the CMBS loan was then transferred to special servicing and a letter of default sent to the borrower, according to servicer commentary reported by financial research firm Morningstar Credit.
The loan is backed by the 242K SF Silver Spring Plaza office building at 8757 Georgia Ave., which was built in 1971. The building is operating at 73% occupancy, while cash flow has fallen “well short” of underwriting levels, according to Morningstar Credit Head of CRE Analytics David Putro.
Adding to the concern, the special servicer’s report says the building’s largest tenant, Social & Scientific Systems, a subsidiary of DLH Holdings Corp., has "gone dark," meaning it has ceased operations in the building despite continuing to pay its rent. S3 occupies 67K SF, or 27.56% of the building’s leasable area, and has a lease through 2031.
A representative from DLH Holdings Corp. told Bisnow in an email that the company still operates in the building through DLH Holdings Corp. and there has been no change in occupancy. The company’s LinkedIn page lists the property as its national capital region headquarters.
Regardless of the largest tenant, the building's overall occupancy level would have been enough to impede refinancing even in a normal lending environment, Putro said.
“With cash flow at this level for several years, reported occupancy at 73% and an additional 28% that has gone dark, this loan had little chance of refinancing,” Putro told Bisnow in an email.
Washington Property Co. and DLH Holdings Corp. declined to comment.
Cash flow on the property has fallen by 35%, Putro said, “well short of underwritten levels.” The building was underwritten with $4.3M of cash flow and 87% occupancy. The property lost tenants during 2021, and with 73% occupancy as of the end of 2022, its net cash flow fell to $2.8M, according to Putro.
The building’s other tenants include law firm Zipin, Amster & Greenberg LLC; nonprofits National Children's Center, Humanity & Inclusion U.S., Columbia Lighthouse for the Blind and TCS Access; and elder care provider The Key, according to their websites.
The special servicer is dual-tracking the loan, according to Morningstar, meaning it is open to either a workout option or foreclosure.
Silver Spring is one of the largest office submarkets in Maryland with 5M SF of inventory, according to JLL’s second-quarter report. The vacancy rate was 19.7% in Q2, according to JLL, right around the 19.4% average for the D.C. Metro area. Meanwhile, demand in Silver Spring was stable in Q2, with a slight net absorption of 5K SF.
Washington Property Co. owns a large portfolio of commercial, residential and retail properties in Maryland and Northern Virginia.
It owns a dozen office properties in Bethesda, Dulles, Greenbelt, Rockville, Vienna and surrounding areas. It also has a 144K SF, six-story building on Conference Center Drive in Chantilly planned for development, according to its website.
In the past few years, the company has been most active in developing mixed-use and residential buildings. In spring 2019, Washington Property Co. delivered the 338-unit Solaire 8250 Georgia in Silver Spring. In November, it delivered the 27-story Solaire 8200 Dixon, a property the company says is the "tallest luxury apartment community in Silver Spring." In Bethesda, Solaire 7607 Old Georgetown Road is set to deliver 198 units in 2024.
The company isn't the only large developer to default on a D.C.-area loan in recent months as the region's office market goes through turmoil. Brookfield in April defaulted on a $161M loan tied to a portfolio of 12 buildings, many of them in the D.C. suburbs. Monday Properties in June defaulted on a loan tied to a $1B Rosslyn office portfolio. Last month, lender JPMorgan foreclosed on a Downtown D.C. office building at 1850 M St. NW owned by an affiliate of Manulife Investment Management.
