A couple of key metrics related to CMBS distress have shown improvement since the depths of the pandemic last year. Trepp reported earlier this month that the CMBS delinquency rate had declined for the 10th consecutive month, while the CMBS 2.0 specially serviced (SS) rate, which reached its peak of 9.60% in September 2020, continues to improve and as of April 2021 was 8.31%.
However, the same can’t be said about appraisals for the underlying real estate in these SS loans. Kroll Bond Rating Agency (KBRA) reports that they’ve been trending negative with larger valuation declines in more recent months compared to earlier in the pandemic.
In an analysis of 1,078 valuations conducted over the past 12 months on properties tied to SS CMBS loans, KBRA found that values were, on average, 30.2% lower than valuations available at the time of securitization, which occurred 4.7 years ago on average.
Comparing valuations conducted over two six-month time periods—April-September 2020 (Period 1) and October 2020-March 2021 (Period 2)—showed a greater average decline in Period 2: 33%, compared to 28.9% in Period 1.
By securitization year, 2011 had the largest valuation decline (49.5%). KBRA says this may reflect the number of malls securitized in that year: six of this vintage’s 18 properties were malls that had an average valuation decrease of 63.8%.
“Another factor could be that properties securing older loans may not have been as well maintained or had levels of deferred maintenance, reducing values compared with newer originated loans, where capital investments may have been done just prior to securitization,” says KBRA.
Retail posted the highest valuation decline (38%) in Period 2. This is mainly attributed to 10 malls that posted declines of 80% or more, with the steepest decline (93%) registered for Oakdale Mall, an REO property in southwestern New York State.
In total, over the full 12-month period of Periods 1 and 2, 53 malls had an average value decline of 62.3%. “Nonessential retail bore the brunt of containment efforts during the pandemic, resulting in many malls shutting down in various parts of the country,” KBRA says.
While lodging valuation declines weren’t quite as steep, peaking at 83.1% for Value Place Williston in North Dakota’s Bakken shale region, SS properties in this sector posted the second-largest declines after retail. Lodging properties also represented the largest share of valuations in the SS pool: a total of 621 between Periods 1 and 2.
Office, which also had several properties with valuation declines greater than 80%, posted the largest jump (56%) between Periods 1 and 2, moving to 37.5% from 24.0%. The 80%-plus declines were attributed to three Texas suburban office assets.
Even for distressed property values, though, there’s light at the end of the tunnel. “Given the negative pandemic-induced impact on CRE operating performance, especially lodging and retail, it is not unexpected that values would have declined during this past year,” KBRA says. “In addition, many of the properties that had an updated appraisal were already in distress prior to the pandemic, meaning they were more susceptible to higher valuation declines during the economic disruption.
“However, with widespread vaccinations and the economic stimulus provided by the federal government, people are starting to return to shopping at brick-and-mortar retail such as malls, and to travel, which will improve lodging performance.”