June 13, 2024

Commercial properties facing the biggest forms of distress have seen their valuations shaved considerably in the past year.
An analysis by The Business Journals found a net total of $6.89 billion in property value has been depleted across 460 properties that secure debt in commercial-mortgage backed securities loan portfolios since August 2021. Fifty-five properties did see an increase in value at reappraisal, although the majority reappraised at less than $1 million higher from when the current loan was initially issued on the property.
Since the start of the Covid-19 pandemic in March 2020, at least $8.53 billion in property value loss has been recorded among 652 properties in CMBS portfolios. A similar analysis conducted by this publication in February found a collective reduction of $9.03 billion in value among 719 commercial properties reappraised since Covid-19, but that included a wider net of properties.
CMBS properties represent only a portion of the broader commercial real estate market.
When a property is facing a specific level of distress — where the foreclosure process has been initiated, for example — an appraisal will be ordered so the lender can more accurately substantiate a property’s value. Tracking reappraised property values among commercial properties flagged by loan servicers is one way to glean which properties, sectors and geographies could face the biggest issues.
Distress, as evaluated by The Business Journals in this analysis, includes properties flagged by loan servicers that are either at least 30 days delinquent on loan payments or in some stage of foreclosure. The data was sourced from Bloomberg and includes financial filings as of Aug. 16.
The two property types most affected initially by the pandemic — and most at risk by changes in consumer spending if the economy enters a recession — have been reappraised more than other sectors.
Hotels continue to make up the biggest share of the pie in terms of total properties reappraised, with 160 of all 460 properties reappraised in the past year. Those hotels saw a collective property value loss of about $2.01 billion, or an average of $12.6 million per property. Retail ranked No. 2, with 118 properties and a collective value loss of $3.12 billion nationally, or an average of $26.5 million per property.
While the office sector only had 46 properties reappraised, it represented $947.6 million of total property value loss between July 2021 and July 2022.
Steven Jellinek, head of CMBS research at DBRS Morningstar, said delinquency rates have continued to drop across the CMBS spectrum as fundamentals hold up and property types that were especially affected by the Covid-19 pandemic recover.
Still, new issuance in CMBS has slowed since the start of the year, owing to higher interest rates and broader uncertainty across the U.S. economy. Jellinek said there was about $47 billion in new CMBS issuance in the first half of the year, outpacing the first half of 2021, but he doesn’t expect the full year of 2022 to beat last year’s CMBS new issuance of $109 billion.
The property type he said keeps him up at night: office.
“We have office buildings that are in a midlife crisis, if you will,” he said. “We’ve got the buildings in their late 30s (and) early 40s that count for about one-third of the national office market today … if they’re going to make it to a normal life expectancy of 60 years, they’re going to need upgrades.”
Spending money so those older buildings can keep up with the new Class A office product that’s lured tenants more successfully, especially since the pandemic, becomes more challenging with more muted tenant demand and, perhaps, the inability for owners to push rents, he added.
The 46 office properties included in The Business Journals’ analysis saw an average value loss of $20.6 million per property at reappraisal.
Manus Clancy, senior managing director at Trepp LLC, said owners of office buildings with major or multiple lease expirations in the next three years could struggle the most.
Jellinek’s own analysis of office properties that’ve been reappraised between July 2021 and July 2022 found those properties were built, on average, 34 years ago. He said there isn’t enough data right now to draw conclusions about market differences, but The Business Journals found major cities like New York and Chicago had the greatest number of properties reappraised in the past year.
But big cities aren’t the only ones seeing values sink among identified distressed properties. Santa Fe, New Mexico, for instance, saw a dozen CMBS-backed properties reappraised in the past year, including six retail properties and four office buildings; the 12 properties had a collective valuation decline of $24.3 million.
Both Clancy and Jellinek believe distress in the CMBS market will play out over the long term, rather than a tsunami of delinquency. How owners react will be on a case-by-case basis, Jellinek said.
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