Commentary Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS
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Commentary
Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS
DBRS Morningstar Overview
August 6, 2020
The unknown future of this pandemic, coupled with excess supply and high vacancies, has eroded the
real estate market in Houston. The Houston commercial real estate market has been overbuilt for several
Contents years and continues to show some of the highest vacancy rates in the country. Developers have built
1 Overview
1 The Drop in Oil Prices
excessive office and hotel space in the city despite consistently high vacancy rates. On top of this pre-
2 Houston’s Energy Dependence existing vulnerability, the Coronavirus Disease (COVID-19) pandemic has sent the price of oil on an
2 It’s Not All About Oil unprecedented course, leaving the Houston real estate market in a state of uncertainty. Furthermore,
2 CMBS Impact
5 High Vacancy Rates in the Office Market Houston is at risk of becoming a new epicenter of the coronavirus. With a spike in new cases—Houston
6 Headwinds for Hotels now averages more than 2,000 new coronavirus cases a day, up from fewer than 200 in April—the city
7 Impact on the Retail Market
has spurred a slowdown in economic activity and commercial real estate performance. With numerous
8 Conclusion
large-scale layoffs occurring, DBRS Morningstar has seen the initial stages of stress on commercial
mortgage-backed securities (CMBS). Since the beginning of April, Houston has seen 55 newly
William McClanahan
delinquent loans totaling $3.20 billion and 38 loans totaling $5.50 billion to special servicing. We expect
Analyst, NA CMBS
+1 847 226-5441 the volume of delinquent and specially serviced CMBS loans to rise as the pandemic continues. Despite
william.mcclanahan@dbrsmorningstar.com Houston's high exposure to energy, its fairly diversified economy should help soften any downturn.
Steve Jellinek
Vice President, NA CMBS The Drop in Oil Prices
+1 312 244-7908 Strict travel restrictions to reduce the spread of the virus have driven a global decline in the demand for
steven.jellinek@dbrsmorningstar.com
oil. The correlation between travel and the price of oil has driven prices to historic lows, as
Gwen Roush representatives from multiple states and cities have urged people to stay at home. In 2018, the
Senior Vice President, NA CMBS
transportation industry accounted for 69% of petroleum consumption (14.2 million barrels per day), as
+1 312 332-9575
gwen.roush@dbrsmorningstar.com stated by the U.S. Energy Information Administration.
The West Texas Intermediary (WTI) crude oil, often used as a pricing benchmark, tumbled to $12.17 per
barrel on April 27 from $44.17 per barrel on February 27. This represents a 72.5% decrease in value over
a two-month time period. The price of WTI oil futures contracts for May delivery turned negative in April
for the first time in history. The lack of demand and consistent supply highlighted storage concerns for
oil producers. These companies had not prepared to store such large quantities of oil, so they were
forced to pay buyers to hold the extra oil. The price of oil has since rebounded to nearly $40.00 per
barrel, but many energy-related companies were not able to withstand the dip in price.Page 2 of 9 Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS | August 6, 2020
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Houston’s Energy Dependence
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Houston is feeling the effects of the oil crash harder than many other cities in the U.S. The state of Texas
Page 2 of 9 provides more than 20% of domestically produced energy, making it the largest producer in the country,
according to the U.S. Energy Information Administration.1 Houston, in particular, is home to 4,600
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energy-related firms and employs almost one-third of the country’s oil and gas extraction jobs. Houston
Page 2 of 9 is also home to 44 publicly traded oil companies and the most engineers of any U.S. metro area.2 For
these reasons, Houston is more susceptible to economic shifts in the energy sector.
Decreasing revenues and layoffs have already become a reality. Bill Gilmer, the director of the Institute
for Regional Forecasting at the University of Houston's Bauer College of Business, had estimated that
44,000 jobs would be lost in Houston by the end of the year.3 This estimate was quickly met, as a report
by BW Research Partnership estimated that Houston lost 51,000 drilling and refinery jobs in March
alone. The Texas Workforce Commission stated that 2,500 oil-related jobs were shed over a 10-day span
from April 13 to April 23. Halliburton, one of the largest oil companies in the country, laid off 1,000
employees at its Houston headquarters in early May. Reis data show that the 80,100 mining and logging
jobs in Houston account for 10.8% of the U.S. total, far less than the 2.1% of U.S. employment that
Houston provides.
Based on research by Dallas law firm Haynes and Boone, Kallanish Energy stated in an article that 19
energy companies in the United States filed for bankruptcy from the beginning of 2020 through the end
of May. Gavilan Resources, a Texas-based energy company, was one of the 19 companies that filed
under Chapter 11. The article also noted that these bankruptcy filings represent $13.1 million of debt.4
It’s Not All About Oil
It is important to note that Houston has diversified its workforce over time. The city provides one of the
largest healthcare systems in the country, employing more than 366,000 individuals at more than 1,760
life science companies. The Texas Medical Center, the largest medical complex in the world, and other
similar facilities, help buffer the economic impact of oil price volatility in Houston.
Further, Houston’s low cost of living, favorable climate, and culture have made it a desirable location to
live. According to the U.S. Census Bureau, Houston added 130,000 residents in 2018 and another
126,000 in 2019. The rising population has helped to diversify the workforce and boost the economy.
While the future of the real estate market may seem bleak, Houston remains a desirable location to live.
CMBS Impact
CMBS exposure to Houston is currently $57.24 billion, making it the seventh-largest metropolitan
statistical area (MSA) by unpaid balance (UPB). DBRS Morningstar has rated $28.41 billion of Houston
debt, representing 49.6% of the total UPB. Houston has seen 78 loans ($3.60 million UPB) request
1 Please see more information on Texas' energy profile on the U.S. Energy Information Administration's website.
2 Please see more general information on Houston on the Greater Houston Partnership website.
3 John Egan, "Economists dive into the economic impact of COVID-19, low oil prices on Houston," InnovationMap, April 9, 2020.
4 Kallanish Energy, "19 energy companies have filed for bankruptcy in 2020: law firm," June 5, 2020.Page 3 of 9 Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS | August 6, 2020
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forbearance since the beginning of this pandemic. These forbearance requests seem to be most
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dominant in the Uptown and Westchase neighborhoods, both located just southwest of the Houston
Page 3 of 9 central business district.
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As the pandemic continues, watchlist, delinquent, and specially serviced loans continue to pile up across
Page 3 of 9 the largest MSAs in the country. The delinquency range among the seven largest MSAs is between 4.2%
and 5.5%, up from 1.2% and 2.6% in early May. Houston has seen 5.1% of UPB become delinquent since
the beginning of April.
Exhibit 1 CMBS Activity by MSA During the Coronavirus Pandemic
Recently Delinquent (COVID) Recently Special Servicer (COVID) Recently Watchlisted (COVID)
New York-Northern New Jersey-Long Island, NY-NJ-PA
Los Angeles-Long Beach-Stanta Ana, CA
Chicago-Naperville-Joliet, IL-IN-WI
Dallas-Forth Worth-Arlington, TX
Atlanta-Sandy Springs-Marietta, GA
Houston-Sugar Land-Baytown, TX
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
Source: DBRS Morningstar.
Delinquencies thus far have been primarily hotels, retail properties, and office properties. The property
type distribution of delinquent loans since the beginning of April can be seen in Exhibit 2.Page 4 of 9 Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS | August 6, 2020
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Exhibit 2 Houston Delinquencies by Property Type
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Multifamily Limited Service Hotel Full Service Hotel Weakly Anchored Anchored Retail Unanchored Retail Office
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Multifamily
Office 6%
Page 4 of 9 11%
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Unanchored Retail Limited Service Hotel
6% 15%
Anchored Retail
19%
Weakly Anchored
0%
Full Service Hotel
43%
Source: DBRS Morningstar.
Per Reis Q1 2020 reports, vacancy rates have been rising for most property types and will likely continue
to rise. Houston has some of the highest office vacancy rates in the country. Given Houston’s exposure
to the oil and gas industry, DBRS Morningstar anticipates office properties to continue to struggle
through this pandemic.
Exhibit 3 Houston Vacancy Projections
Office Multifamily Industrial Retail
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2015 2016 2017 2018 2019 2020 2021
Source: DBRS Morningstar.Page 5 of 9 Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS | August 6, 2020
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High Vacancy Rates in the Office Market
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Houston office space is overbuilt and has higher vacancy rates than most other large cities in the
Page 5 of 9 country. For this reason, we believe the office market is particularly at risk as we navigate this pandemic.
In the last 12 months, Houston office space has seen a negative absorption of 106,000 square feet (sf).
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Since 2015, five years of consistent negative absorption left Houston with a total of 6.7 million sf of
Page 5 of 9 excess office space, indicating that office space in the Houston market was overbuilt before the
coronavirus. The Q1 2020 average office vacancy is 24.7%, according to Reis. The vacancy rate has risen
consistently for the past five years from 16.5% in Q1 2015. Additionally, the average asking rent of $28
per square foot (psf) is one of the lowest in the country. Office space nationwide has been hit as many
companies continue to work from home, but Houston will struggle more with the additional burden of
the weakened oil and gas industry.
Houston along with other large markets have seen record high availability of sublease office space
during the pandemic. At the end of the second quarter of 2020, Houston had 5.4 million sf of office
space available for sublease.5 While other markets have seen this drastic increase begin with the
pandemic, Houston office space has been available for sublease for quite some time. Following the oil
crash in 2014, Houston had roughly 12.4 million sf available for sublease. While these figures remain
high compared with before the pandemic, this sublet glut is not being backfilled with new tenants as
easily. Social distancing restrictions and the widespread economic downturn have made it challenging
for companies to sublease their excess office space.
DBRS Morningstar rates several loans that have been struggling. Three loans with a combined trust
balance of $124.8 million have been transferred to special servicing because of the impact of
coronavirus.
Office Loans Transferred to Special Servicing
Size (sf) Occupancy Trust Transaction % of Pool DBRS
(%) Balance ($) Morningstar
Rated (Y/N)
The Cypress 46,380 96.0 9,100,000 WFCM 2016-C34 1.3 Yes
Medical Plaza
The Pinnacle at 470,940 25.0 79,827,198 CGCMT 2012-GC8 9.8 No
Westchase
The One 466,159 83.0 47,000,000 JPMCC 2017-FL11 11.5 Yes
Westchase Center
Source: DBRS Morningstar.
The Cypress Medical Plaza, a 46,000-sf office property that was securitized in the WFCM 2016-C34
transaction with an issuance trust balance of $9.1 million, was recently transferred to special servicing
after a month of delinquent payments.
The Pinnacle at Westchase (not rated by DBRS Morningstar) is a 471,000-sf office property that
represents nearly 10% of the CGCMT 2012-GC8 transaction. The loan was transferred to special servicing
5 Patricia Kirk, "Amount of Office Sublease Space Rises Rapidly in Some Markets in Response to Sputtering Economy," National Real Estate Investor,
July 23, 2020.Page 6 of 9 Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS | August 6, 2020
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in February 2020 and defaulted later that month. The Pinnacle at Westchase is an example of a loan that
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was struggling before the pandemic, with occupancy dropping to roughly 25.0% in December 2019.
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The One Westchase Center is a 466,000-sf office building that backs approximately 11.5% of the total
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pool balance in JPMCC 2017-FL11. The loan is sponsored by Investcorp, which officially requested to
Page 6 of 9 hand over the loan to the lender in June 2020 because of declining performance. Occupancy had slowly
declined to 83.4% as of YE2019, which was still shockingly better the Reis submarket vacancy rate of
22.7%. The property’s low rental rates of $17.89 psf, paired with high vacancy, provide a debt service
coverage ratio (DSCR) that barely breaks even despite extremely low Libor rates. The largest tenant, IBM
(8.4% of net rentable area), downsized in 2019 by 7,160 sf and signed at $15.50 psf, compared with its
prior rate of $20.00 psf.
Headwinds for Hotels
Not surprisingly, the hotel space in Houston has struggled the most in the past few months. Of the $8.69
billion worth of securitized hotel loans in Houston, DBRS Morningstar has seen 14 hotel forbearance
requests on $223.9 million, 16 transferred to special servicing totaling $282.4 million, and 28 delinquent
loans on $548.2 million of combined CMBS debt. Of the struggling properties spread throughout the
MSA, $1.8 billion has requested forbearance, $4.0 billion has been transferred to special servicing, and
$2.0 billion has been delinquent to some extent.
Hotel Loans Transferred to Special Servicing
Units Occupancy Trust Balance ($) Transaction % of Pool DBRS
(%) Morningstar
Rated
Hilton Houston Post Oak 448 74.0 42,999,199 JPMBB 2014-C25 4.2 Yes
DoubleTree Houston 313 83.0 41,998,374 JPMDB 2016-C2 4.8 No
Intercontinental Airport
Sheraton Suites Houston 283 70.0 36,600,409 GSMS 2014-GC20 4.3 No
Hilton Houston Post Oak 448 74.0 33,443,821 JPMBB 2014-C24 3.1 No
Crowne Plaza Houston Katy 207 n.a. 29,923,932 COMM 2014- 2.9 Yes
Freeway CCRE20
Aloft Houston by the 152 87.0 30,856,052 WFCM 2015-C26 3.7 No
Galleria
Residence Inn – Katy Mills 126 73.0 14,119,998 WFRBS 2014-C19 1.5 No
Hilton Garden Inn – Houston 182 73.0 13,700,872 SGCMS 2016-C5 1.9 No
Bush Airport
Hilton Garden Inn Houston 126 63.0 10,379,151 JPMBB 2014-C26 0.9 Yes
Hilton Garden Inn – Katy, TX 101 67.0 7,343,745 MSBAM 2013- 0.8 No
C12
Holiday Inn Express 91 76.0 8,084,253 COMM 2015-DC1 0.7 No
Baytown
Holiday Inn Houston SW 206 53.0 7,433,624 UBSCM 2018-C12 0.8 No
Sugar Land Area
Staybridge Suites Stafford 90 74.0 5,885,922 WFRBS 2013-C13 0.9 No
Homewood Suites Houston 64 67.0 6,257,829 WFCM 2015-LC22 0.7 Yes
Intercontinental
Best Western Fountainview 72 59.0 5,112,524 WFCM 2015-LC20 0.7 YesPage 7 of 9 Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS | August 6, 2020
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Hampton Inn – Katy, TX 69 68.0 2,376,443 MSBAM 2013- 0.4 Yes
Page 7 of 9 C11
Source: DBRS Morningstar.
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The Hilton Houston Post Oak was securitized in the JPMBB 2014-C25 transaction, representing 4.2% of
Page 7 of 9 the current pool with an issuance trust balance of $45.0 million. The 448-key hotel is worth $126.2
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million and has been delinquent on loan payments for more than three months. The loan was transferred
to special servicing in June.
The Residence Inn – Katy Mills, a 126-key hotel in Katy, Texas, was transferred to special servicing in
April. The property was securitized in the WFRBS 2014-C19 transaction, representing 1.5% of the pool
balance. The loan defaulted on the May 2020 payment; there is currently a hard lockbox in place and the
lender is trapping all cash flow.
The Best Western Fountainview is another struggling limited-service hotel. The property was transferred
to special servicing in April after missing payments. The 72-key hotel was securitized in the WFCM 2015-
LC20 transaction and had issues in the past. It was transferred in 2016 with a DSCR of 0.51 times (x).
Similar to other major cities in the United States, Houston hotel space has experienced major disruptions
because of the pandemic and resultant travel restrictions. DBRS Morningstar anticipates the hotel space
to recover in 2021, but the lasting impact may put some out of business.
Impact on the Retail Market
Of the $6.2 billion of retail CMBS loans in the Houston-Sugar Land-Baytown MSA, $385.0 million has
requested forbearance, $119.1 million has been transferred to special servicing, and $166.0 million is
delinquent.
Retail Loans Transferred to Special Servicing
Size (sf) Occupancy Trust Transaction % of Pool DBRS
(%) Balance ($) Morningstar
Rated (Y/N)
Vintage Park 341,107 90.0 44,033,695 MSBAM 2016-C31 4.8 No
North Oaks 448,740 72.0 31,435,402 COMM 2013-CCRE9 3.0 No
Greens Crossroads 148,387 81.0 11,052,056 COMM 2012-CCRE2 1.0 No
Long Meadow Farms 39,175 n.a. 9,900,971 DBJPM 2017-C6 0.9 Yes
8350 & 8366 23,116 93.0 6,588,470 WFCM 2015-C31 0.7 Yes
Westheimer
LA Fitness – 45,000 100.0 5,990,113 WFCM 2015-P2 0.6 No
Pearland
LA Fitness Spring 34,000 n.a. 5,750,000 BBCMS 2019-C5 0.6 No
West Crossing 13,335 100.0 4,371,953 WFCM 2016-BNK1 0.5 No
Shopping Center
Source: DBRS Morningstar.
North Oaks is a retail center in northwest Houston. The $31.4 million loan represents 3.0% of the COMM
2013-CCRE9 transaction and was recently transferred to special servicing in June after intermittent
delinquencies throughout 2020. The loan had a DSCR less than 1.0x throughout 2019, and the borrower
indicated that operations at the property had been further affected by the coronavirus pandemic.Page 8 of 9 Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS | August 6, 2020
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Long Meadow Farms, the largest DBRS Morningstar-rated retail loan transferred to special servicing,
Page 8 of 9 represents nearly 1.0% of the DBJPM 2017-C6 transaction with a trust balance of $9.9 million. The loan
was added to the watchlist in May 2018 and has now been delinquent for over four months. After an
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increase in the real estate tax escrow requirement in May 2018, the borrower indicated that the
Page 8 of 9 property’s cash flow was barely covering the debt service payments. The loan has once again become
delinquent, and it will be much harder to recover in the current retail environment.
The retail sector in Houston has struggled through the pandemic, but revitalized consumer spending
figures have helped to curb the decline seen in March and April.
Conclusion
Oil dependency and overbuilding have made Houston a challenging real estate market to navigate
during this pandemic. Pre-existing issues with overbuilt markets and high vacancies caused Houston to
be hit especially hard. However, the Houston market has persevered and currently presents similar
figures when compared with other large MSAs. The growing population in Houston and its diversified
job market have helped to curb what might have been an even larger hit to the commercial real estate
market. As we continue to see delinquency rates and forbearance requests rise across the country,
DBRS Morningstar will continue to pay close attention to Houston.
Note:
All figures are in U.S. dollars unless otherwise noted.
.Page 9 of 9 Coronavirus and Volatile Oil Prices Elevate Risk on Houston CMBS | August 6, 2020
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