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Regional Malls Bear the Brunt of Declining Appraisal Valuations
U.S. retail property appraisal valuations took a big hit during the pandemic and may not have reached their nadir yet, Fitch Ratings says. Overall, recent property appraisal valuations received for CMBS specially serviced loans across sectors since the start of the coronavirus pandemic have declined 34% from their valuations at issuance.
Retail properties saw value declines averaging 38.9%, with the largest declines to Class B/C regional malls. “We believe retail valuation declines incorporate a more permanent impairment to property-level cash flows,” according to Fitch.
Assets already in special servicing before March 2020 saw greater average declines than those that transferred since then, as the pandemic amplified existing performance concerns, says Fitch. The bulk of loans transferred to special servicing since the pandemic began have been primarily hotel and retail assets.
The rating agency’s loss expectations have increased on underperforming regional mall loans and incorporate significantly higher cap rates than used at issuance, as well as additional haircuts to servicer-reported NOI.
Hotel valuations declined by 32.5% and are expected to have reached a trough for properties without pre-pandemic performance concerns. Fitch says it may not rely on the current low appraisal valuations in determining long-term hotel value as the agency expects cash flows to rebound as the sector recovers in 2021’s second half.
In other sectors, lower valuations are mostly limited to student housing and assets that have already transitioned to REO.
- ◦Financing
