KBS REIT Faces Reckoning as Office Values Plunge

Facing $1.7B in loan maturities in the next 12 months as valuations of its office assets plunge, KBS Real Estate Investment Trust III has warned shareholders there is “substantial doubt” it can stay in business.

According to a regulatory filing, the Newport Beach, CA-based fund reported last month that the net asset value of its portfolio, estimated at $1.3B in September 2022, has fallen to about $833M as of last month, a drop of more than $430M.

“Considering the current commercial real estate lending environment, this raises substantial doubt as to KBS REIT III’s ability to continue as a going concern,” the shareholders were told.

“Continued disruptions in the financial markets and economic uncertainty could adversely affect the company’s ability to implement its business strategy and continue as a going concern,” the statement to shareholders continued.

The filing said the KBS REIT “anticipates it may relinquish ownership of one or more secured properties.”

The company, which has more than $1B in office holdings across the country, cited “severe leasing challenges” facing the San Francisco market, which is struggling with a 35% office vacancy rate as well as surging crime and homelessness in its hollowed-out downtown.

KBS has given back the keys on 201 Spear Street, a 253K SF SF building in San Francisco which saw its occupancy drop from pre-pandemic levels of 97% to 64% in September 2023.

The lender on 201 Spear is finalizing the sale of the mortgage loan and title to the property in a Deed in Lieu agreement with KBS. The deal is expected to close for about $60M, which is less than half of what KBS paid for the property in 2013. KBS took a $51M write-down on the South Financial District tower last month.

The KBS REIT reported that substantial declines in both occupancy and leasing at its Bay Area assets have had a significant impact on the REIT’s ongoing cash flow.

According to the regulatory filing, KBS REIT III also is facing difficulties at 60th South Street, a Minneapolis office building that was 77% occupied as of September.

KBS’s significant office holdings in Dallas, which include the Preston Commons and Sterling Plaza office buildings in the Preston district in North Dallas, appear to be in much better shape than its San Francisco holdings. The three office towers in Dallas are more than 90% leased, according to a report in the Dallas Morning News.