Appraisal Values of Distressed Loans Highlight CMBS Stress: KBRA
KBRA conducted research on the relationship between distressed loan appraisal values and the performance of commercial mortgage-backed securities (CMBS). Given the continuous growth in CMBS delinquencies, KBRA examined updated appraisal values for distressed CMBS 2.0 loans from January 2021 to May 2024.
There were over 1,100 loans under special servicing with revised appraisals, and the total gap between the most recent appraisal and the origination appraisal value was about $36.6 billion, or a 43.7% drop., according to KBRA.
The assessment period encompasses a period of rising loan distress due to higher interest rates, inflationary pressures, the pandemic’s impact on lodging demand, the rise of e-commerce, and longer-term structural changes in office.
KBRA found 2,293 updated appraisal values across the collateral of 1,135 loans. Each of the loans were specially serviced during the study period, as they were likely facing distress.
The commercial real estate collateral for these 1,135 loans had an aggregate origination appraisal value of $83.8 billion, however the most recent appraisal shows that the value has dropped 43.7% to $47.2 billion.
The average decline per loan was 36.9%, while lower-value properties had a lower average decline and made up a smaller share of the total origination value.
For example, loans backed by assets valued at less than $20 million at origination accounted for 43.2% of the 1,135 loans and had an average decline of 29.6%, although they accounted for just 6.9% of the total origination value.
Lodging experienced the least level of value degradation, down 27.9%, followed by multifamily at 35.1%. Retail saw the greatest loss in value at 52.8%, followed by mixed-use and office at 49.2% and 44.6%, respectively.
Reviewing the 2,293 updated appraisals in half-year cohorts, KBRA observed that overall value declines were flat between the first half of 2021 and the first half of 2022, averaging 35% below origination appraisal.
The declines then steadily increased amid higher rates, more loan maturities, office asset pressure, and continued stress on weaker malls, with the year-to-date through May 2024 average rising to 45%.
For loans with an updated appraisal in 2023 or year-to-date through May and at least one earlier updated assessment, the values decreased by 3.7% between the two appraisals, with office seeing the greatest fall (8.4%). Lodging performed the best, with a relatively steady 0.9% fall.