For this Field Note, we wanted to share a few lessons from one of the more challenging projects in our portfolio, the MLK office building in Austin, and the decision we made to bring in a joint venture partner, Fuse, to help stabilize and preserve the asset.
This project began prior to COVID, at a time when the office market, leasing assumptions, and capital markets all looked very different than they do today. Like many developments that were underway in 2019 and early 2020, the project moved forward based on conditions that changed significantly before the building was fully stabilized.
The pandemic created a combination of slower leasing, higher construction costs, and tighter lending conditions that made the path to stabilization longer than originally expected. While the building itself has performed well operationally and leasing has steadily improved, the capital structure that made sense at the start of the project became more difficult to manage as the market shifted.
In situations like this, our focus is not on avoiding change, but on protecting the long-term value of the asset. After reviewing several alternatives, we determined that bringing in a partner with additional capital and flexibility was the best way to reduce risk, extend the runway for leasing, and allow the property time to reach its full potential.
Fuse shared our view of the building’s long-term value and was willing to structure a joint venture that allowed the existing partnership to remain involved while strengthening the balance sheet. While no one prefers to restructure a deal after the fact, we believe this approach was far better than forcing a sale or operating under a capital structure that did not fit the current market.
One of the realities of development is that projects often span multiple economic environments. When that happens, the ability to adapt becomes as important as the original underwriting. In this case, the decision to bring in a partner was not about changing the strategy, but about giving the project the time and capital it needed to succeed.
The experience reinforced a lesson we have seen before — preserving an asset through a difficult period can ultimately create more value than trying to exit at the wrong time.
We continue to believe the MLK building is a well-located, high-quality property, and we are optimistic about its long-term performance as leasing continues to improve and the office market gradually stabilizes.
As always, we appreciate your continued partnership and the trust you place in us as we work through both the successes and the challenges that come with development.
