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Morningstar Puts Loan for Bryan Tower in Dallas on Watchlist as Owner Sees Higher Rent Opportunity

Largest Tenant, Baylor Scott & White, Plans Exit in Move the Owner Says May End Up Boosting Returns
October 8, 2018
Morningstar Credit Ratings has placed the $61.9 million loan on Bryan Tower, 2001 Bryan St., on its watchlist, citing the departure of the building's largest tenant, Baylor Scott & White. The owner says it isn't concerned.



In office buildings across the country a debate often rings out when a major tenant decides to leave: Is it a threat to the owner's ability to pay its loans or a great opportunity to get a higher-paying tenant? That situation is playing out right now in downtown Dallas.

Health care provider Baylor Scott & White's upcoming consolidation into a soon-to-be-built 10-story, 300,000-square-foot office tower could have an adverse effect on the financial stability of a loan tied to the Dallas building it's leaving, according to the Morningstar Credit Ratings service.

The company, which recently said it plans to move to a $70 million project at 3700 Elm St., doesn't plan to renew its office lease at Bryan Tower, 2001 Bryan St., on the eastern side of downtown Dallas. In all, Baylor Scott & White leases about 262,247 square feet of office space in the 1.1 million-square-foot Bryan Tower building, according to CoStar data.

That consolidation could impact the financial future of the commercial mortgage-backed security loan totaling $61.9 million on Bryan Tower, according to Morningstar Credit Ratings. The service recently placed Bryan Tower on its watchlist, saying the upcoming departure of the building's largest tenant makes it harder for loan payments to be made.

However, Spire Realty Group, the Dallas-based owner of the tower, isn't worried about the move.

"We are not really concerned," said Jon Ruff, president and partner at Spire. "We've got two-and-a-half years of lease term left with Baylor, and we feel market rents have gone up dramatically since the original lease was signed. We have to lease a significantly smaller amount of space to replace that income. Given that and the runway in front of us, we are optimistic about it and excited about this opportunity for the building."

Morningstar estimates the 40-story property's value at $53.8 million, which is down from its previous valuation of $73.8 million. That movement in value translates into a 115.1 percent loan-to-value ratio, putting the loan, which matures in October 2020, two months after Baylor Scott & White's existing lease expires at Bryan Tower, in jeopardy, according to Morningstar.

In looking at the loan, Steve Jellinek, Morningstar's vice president of CMBS research, said his team weighed the chances the Baylor Scott & White space at Bryan Tower would be backfilled by another tenant.

"We looked at the submarket and the rental activity is tepid," Jellinek said. "The submarket has a high vacancy rate compared to the overall Dallas vacancy rate. It is over 10 percent higher than the overall Dallas vacancy rate, which gives us pause."

Ruff said there's a divide between the "have" and "have not" office buildings in downtown Dallas. And, he said, Bryan Tower falls in the "have" bucket.

"The market is pretty good, and what we are doing to the building puts us in good shape for leasing space," Ruff said. "We've recently signed a full-floor lease for a corporate headquarters relocation. We are also in leases for a separate corporate headquarters relocation to Dallas."

Spire plans to begin an upgrade for millions of dollars to Bryan Tower this month, which includes the addition of a tenant patio and lounge on the ground floor of the building, with a newly signed Italian market taking a big lease on the ground floor to provide food and beverages from breakfast to lunch to happy hour.

Those improvements are meant to bolster Bryan Tower's occupancy rate, which currently sits at 75 percent, and help fill Baylor Scott & White's office footprint when the firm's lease expires in two-and-a-half years, Ruff said.

That footprint could be a huge opportunity for Spire to snag a major tenant at a higher lease rate. The average asking rent in this part of downtown Dallas is $25 per square foot, according to Morningstar, compared to Baylor Scott & White's current rent of $14.50 per square foot.

That gives Spire some ability to offer a discounted rate to a big tenant moving in the market, Jellinek said.

"They have a lot of room to play in terms of the rate, but the question remains more on the demand side," he added. "It will be difficult finding a single tenant to take all of Baylor Scott & White's space, and they may have to rent it out in pieces. It could also take years to find a tenant."

Bryan Tower's CMBS loan is the largest Dallas loan on Morningstar's watchlist. The next-largest office building loan on the list in North Texas is the $33.8 million loan for The Crossings I and II office buildings spanning 529,128 square feet of office space at 5429 and 5501 Lyndon B. Johnson Freeway in Dallas.

Last month, Topeka-based Payless Shoe Source moved multiple corporate departments, including its marketing, buying, legal and real estate divisions, to Bryan Tower. Ruff declined to disclose the would-be relocation to Dallas his team is working to close.

Jellinek said Dallas' central business district has a higher office vacancy rate compared to other North Texas submarkets because of its older inventory. The age of the city's skyline has landlords and owners behind office skyscrapers such as Trammell Crow Center, Fountain Place and Chase Tower, upgrading buildings with sought-after amenities to lure in corporate tenants.

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