Now Coming to the Commercial-Property Market: Defaults
New signs of weakness emerging; ‘There’s going to be a correction’
For nearly a decade, the 14-story Houston office building called Northborough Tower proved a reliable investment for fund manager Behringer Harvard, staying fully leased and generating millions in profit.
But now the gleaming building is being surrendered to creditors. Its $21 million mortgage came due in January, and Behringer Harvard wasn’t able to find buyers willing to pay more than that. At the same time, its only tenant is leaving and the Houston office market is reeling from low oil prices.
“We received no offers above the debt balance,” said Thomas Kennedy, president of the Behringer Harvard fund that bought the building for $33 million in 2007.
New signs of weakness are surfacing in the commercial-property market, ending a half-decade run of improvement with steadily climbing values. Amid global shifts like the sluggish Chinese economy and a new era of low oil prices, defaults on loans are popping up in areas that were considered overheated, occurring in small numbers for now, but stoking fears that more could be on the way.
This comes as there is a growing view that the best days are in the past for this property cycle, which benefited strongly from low interest rates and demand by global investors from regions like China and oil-dependent economies in the Middle East.
“We’re at the top of the market,” saidKenneth Riggs, president of Situs RERC, a real-estate research firm that advises investors on property values and market direction. “There’s going to be a market correction.”
If there is a downturn, few expect it to be severe because the economy is still creating a healthy level of jobs and lending has been far less aggressive than in past booms like 2007, when highly leveraged developers defaulted as the market slowed. Developers back then were routinely able to secure debt for more than 90% of the value of a building, compared with less than 80% today.
Any correction now, Mr. Riggs said, will be “let’s call it, manageable.”
Still, there are several pockets of concern.
Photo: Kevin Hagen for the Wall Street Journal