Behind the Jump in Appraisal Reduction Amounts

One good way to track CMBS loan losses is to follow appraisal reduction amounts (ARAs).

So Kroll Bond Rating Agency’s recent numbers can be telling.

Kroll reported that 409 ARAs had been effectuated year-to-date through November 2020 on CMBS 2.0 conduit transactions. For full-year 2019, there were 111 ARAs. Overall, 2020’s number was 3.7 times higher.

Currently, there are $3.1 billion of ARAs outstanding among 442 loans. Not surprisingly, more than three-quarters of the outstanding ARAs by principal balance are collateralized by retail (54%) and lodging (24%) assets.

Kroll says about one-half of the loans with ARAs effectuated YTD 2020 and 2019 appear to have been automatic. When automatic ARAs were excluded, more than 80% of the realized losses exceeded the ARAs initially effectuated.

New York and Texas led the way with the two largest ARA exposures, at $566.7 million and $478 million, respectively. In all, they account for about one-third of all outstanding ARAs.

The 10 deals with the highest ARA exposures have cumulative ARA amounts ranging from 6.7% to 16.8% of their outstanding principal balance.

Kroll’s ARA numbers come as other organizations are warning about rising distress levels.

CoStar Group expects a large scale of distressed sales to hit mid-2021. The company modeled 16 different scenarios to determine how bad the carnage would be from this recession. The amount of distress landed between $92 billion to $370 billion in those exercises, though it will likely be $126 billion. “It’s a pretty wide range,” says Xiaojing Li, managing director at CoStar Group. “We think it [the amount of distress] could be a blended scenario that is somewhere in the middle.” 

In November, Trepp reported that 30-plus day delinquency rates hit a near all-time high of 10.3% by June 2020. Lodging and retail delinquencies moved up to 24.3% and 18.1%, respectively; the highest on record for the CMBS industry. 

Some companies are already anticipating a wave of distress. 

Bayer Properties managed assets in servicing during the Global Financial Crisis. Executive Vice President of Operations Doug Schneider expects to see more opportunities coming through the pipeline.

“In many ways, I hate to see it come back, but there is going to be a need,” Schneider says. “We previously demonstrated an ability to turnaround an asset from a servicer position to a profitable sale, benefitting the seller, purchaser and ultimately the consumer and community. It’s no secret that the US is over-retailed, so we need to find alternative mixed-uses for the real estate which serves an unmet demand.”

Even relatively safe sectors are showing cracks.

Trepp searched for all multifamily loans from private-label, US CMBS deals where occupancy had fallen more than 15% from 2019 through partial-year 2020. It found about 50 loans totaling almost $1.5 billion in outstanding balance. That total represents about 3.8% of the loans that have reported partial-year 2020 occupancy thus far.