Losses On Defaulted CRE Loans Remain Below GFC Levels
Price growth has offered lenders some downside protection in the event of a default.
Losses taken by lenders on previously defaulted CRE loans remain below rates seen in the Great Financial Crisis, according to an analysis by Real Capital Analytics.
“It is possible we have not seen the worst of the losses as economic uncertainty tied to the pandemic and the crisis in Ukraine still looms,” writes RCA’s Alexis Maltin in the recent analysis in the firm’s US Capital Trends report. “So far, however, the availability of debt and pent-up investor demand have helped buoy prices. This price growth has offered lenders some downside protection in the event of a default.”
Lenders posted an average 19% loss in value from initial loan amounts across the five core CRE asset classes in 2021, compared with 36% at the peak of the last recession. Last year, loss rates on office loans fell the most from prior year levels, with the current loss rate for suburban assets sitting at 17%. That’s three percentage points lower than CBD office assets.
“Price growth for CBD assets did turn positive in 2021 after dipping in 2020, but suburban office price growth was far greater,” Maltin notes.
RCA’s analysis also notes that the price growth and loss rates for shopping centers and full-service hotels “appear to be unrelated,” adding that “the lack of correlation is a function of those assets within these subtypes that are driving each metric.”
The largest losses for the shopping center subtype were tied to mall assets, while the biggest losses for hotels relate to budget or business traveler properties.
More capital has entered the marketplace this year, but lenders appear to be exercising more restraint with underwriting practices given inflation headwinds.
“Capital providers are carefully considering the strength of the borrower and their experience in the office sector,” Marcus & Millichap notes in a recent report. “Specific property characteristics such as location within a market and submarket are also vital factors in obtaining financing, as is the credit quality of the tenants in place. The remaining term of any leases as well as the build-out of the specific facility are also important determinants.”