Friday, November 20, 2009

Credit analysts: Dallas' Galleria office towers in danger of default

A high-profile Dallas office project has made the list of major U.S. properties that credit analysts predict will wind up in default.

The Galleria office towers – three buildings with more than 1 million square feet of space next to the Dallas shopping mall – were singled out in a recent report by Fitch Ratings.

Fitch downgraded and revised its outlook on the financing for Galleria towers when it looked at commercial mortgage debt held by JPMorgan Chase Commercial Mortgage Securities Trust.

The Wall Street rating firm said the debt payments on the Galleria buildings are current and they also have a high occupancy rate. But Fitch said in the report issued last month that it expects the interest-only loan to default and “incur losses of approximately 20 percent.”

The default forecast is based on anticipated declines in cash flow from the Galleria buildings and falling values.

The Galleria office towers are considered among the most successful properties in the area around the Dallas North Tollway and LBJ Freeway.

The buildings -- constructed between 1981 and 1990 -- were bought in mid-2008 by investor Cannon Commercial of Los Angeles. The deal was one of the largest in North Texas in a decade and was estimated at more than $300 million.

The buildings are about 90 percent leased. Major tenants in the project include Fedex, Highland Capital and Invesco.

Dallas-based John Bowles Co. handles leasing of the project. Founder John Bowles said the Fitch report was news to him and that he was unaware of any problems with the debt on the buildings.

Bowles said Friday that the owner “was here last week and gave us marching orders to keep doing what we are doing.”

With the shakeout in real estate values and lack of credit for refinancing, thousands of commercial properties around the country are facing debt problems.

It remains to be seen how much of this real estate will ultimately wind up in default or face foreclosure.

“The foreclosure activity has actually been slower than we anticipated,” Jim Yoder, managing director at Jones Lang LaSalle, said at a Friday morning panel on commercial real estate sponsored by The Dallas Morning News.

The debt on the Galleria buildings was among 29 “loans of concern” Fitch detailed in its October debt downgrade. The loans all mature by 2017.