KBRA released research about the connection between appraisal values of distressed loans and CMBS performance. In light of the continued rise in CMBS delinquency rates, KBRA reviewed updated appraisal values from January 2021 through May 2024 of distressed CMBS 2.0 loans. In total, there were more than 1,100 loans that were in special servicing with updated appraisals. The aggregate difference between the most recent appraisal and origination appraisal value showed a 43.7% decline of approximately $36.6 billion.

The review time frame captures a period of increased loan distress owing to higher interest rates, inflationary pressures, the pandemic’s impact on lodging demand, and the rise of e-commerce, as well as longer-term secular changes in office. KBRA found 2,293 updated appraisal values across the collateral of 1,135 loans reported during the study period. Each of the loans were specially serviced during this period, as they were likely facing distress.

Key Observations

• The commercial real estate collateral of these 1,135 loans had an aggregate origination appraisal value of $83.8 billion, and the most recent appraisal shows the values have declined 43.7% to $47.2 billion.

• The average decline per loan was lower, at 36.9%, as lower-value properties had a lower average decline and constituted a smaller proportion of the aggregate origination value. For example, loans secured by assets valued at less than $20 million at origination accounted for 43.2% of the 1,135 loans and had an average decline of 29.6%, but were only 6.9% of the aggregate origination value.

• Lodging showed the least amount of value degradation, with a 27.9% decline, followed by multifamily at 35.1%. Retail experienced the highest decline in value at 52.8%, followed by mixed-use and office at 49.2% and 44.6%, respectively.

• Reviewing the 2,293 updated appraisals in half-year cohorts, we observed that overall value declines were flat between 1H 2021 to 1H 2022, averaging 35% below origination appraisal. The declines then steadily increased amid higher rates, more loan maturities, office asset pressure, and continued stress on weaker malls, with the year-to-date (YTD) through May 2024 average rising to 45%.

• For loans that had an updated appraisal in 2023 or YTD May 2024 and at least one prior updated appraisal, the values generally declined 3.7% between the two appraisals, with office showing the largest decline at 8.4%. Lodging fared the best, with a relatively flat 0.9% decline.

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