A Weekly Look at the Commercial Mortgage-Backed Securities Business
The 41-story EY Plaza in downtown Los Angeles, pictured center, represented a major office building reappraisal in the fourth quarter among delinquent CMBS loans, with its value down by more than half since 2020. (CoStar)
By Mark Heschmeyer
CoStar News
January 18, 2024 | 8:13 AM
This week's column looks at the reappraisal of CMBS loans, a new cautionary sign for office loans and a warning about the maturing apartment loans. To read the full report, click "read more" below.
Reappraisal Values Drop: The reappraisal last year of properties backed by specially serviced commercial mortgage-backed securities loans reflects shifting valuations among major property types, according to data from CoStar Risk Analytics.
Properties backed by CMBS loans are typically reappraised when the payments are delinquent. Overall, the average reduction in value, irrespective of property type, was 38% last year compared to 35% in 2022. The percent measures the change from the original underwriting value to the reappraisal value.
By sector, retail and office saw the steepest average appraisal reductions. Retail values were down 53% compared to 42% a year earlier. The average office value reduction was 39% in 2023, similar to 2022.
The average value reduction percentage was the steepest year over year for multifamily properties, going from a 3% reduction in 2022 to a 30% reappraised value reduction last year.
In terms of the dollar amount of the properties involved, the total value of reappraised real estate declined to less than $50 billion for the first time in at least the past four years.
Among real estate types, there was a sizable drop in the total dollar amount of multifamily, retail and hospitality properties that were reappraised.
By contrast, the dollar amount of reappraised office properties went up, even though values tended to go down, because more loans were sent to special servicing. The dollar amount of office properties reappraised last year shot up from $11.7 billion in 2022 to $19.7 billion.
Industrial properties also saw the total dollar amount of reappraised loans go up, in part because many properties are now worth more. About $2.8 billion in warehouse properties were reappraised last year, up from just $600 million a year earlier. The total value of those reappraised properties moved up 15% to $3.2 billion in 2023. Warehouse values were down 13% a year earlier.
The dollar amount of hotel properties reappraised continued to decline last year with $8.7 billion reappraised. That is down from $25.2 billion in 2020 during the outbreak of the pandemic. Average hotel value reductions have held steady at around 29% over the past four years.
New Office Loan Delinquencies Outpace Workouts: The amount of CMBS loans in special servicing backed by office properties fell in December, but the drop offered little hope for continued improvement. The drop was due to several large office loans being returned to master servicing after loan modifications were put in place, as CoStar reported a month ago.
Office loans have the largest dollar amount inflow to the delinquency bucket and have largely been logging consecutive monthly increases, according to Morgan Stanley Research data. There has been an average net inflow of $396.4 million over the past six months on office loans, which exceeds that of retail, at $164.8 million; lodging, at $51.1 million; multifamily, at $109.8 million; and industrial, at $20.6 million.
While a few large-dollar office loans were modified and removed from special servicing, several smaller loans were added. The number of office buildings backing the specially serviced loans increased nearly 2% in December from November to 771 properties, according to CoStar data. The total square footage now in special servicing was 136 million with an average vacancy rate of 31.9%.
Of the major property types, the multifamily sector posted the largest increase in real estate backed by loans in special servicing. The rate went up 9.6% over November to 493 properties totaling 35,924 units, according to CoStar data.
By property count, industrial was up 0.6% to 172 properties totaling 11.3 million square feet, according to CoStar data. More than half of the square footage figure, 6.7 million square feet, was made up of flex space, which often includes a large amount of office space usage.
The count of retail and hospitality properties backed by loans in special servicing fell month over month in December. Retail square footage dropped from 72.8 million square feet to 70.1 million square feet. One hotel was removed from the count, dropping the number of rooms from 60,552 to 60,165.
Multifamily Loan Risk Rises: The confluence of higher interest rates, slowing rent growth and a greater share of multifamily debt coming due over the next few years is causing an increased refinance risk among maturing loans, according to Freddie Mac.
Roughly 42% of all commercial real estate loans maturing in 2024-2025 are backed by multifamily assets, totaling around $500 billion, according to Freddie Mac.
It is the shorter-term debt, especially loans originated during the trough in the interest rate cycle between 2020 and 2022, that has an increased risk of meeting refinance requirements if growth in property net operating incomes is not enough to offset the higher debt service payments.
Shorter loan terms have become more common since the pandemic. From 2017-2019, 25.9% of multifamily loans had terms of seven years or less compared with 33.9% from 2020-2022. The story is similar for loans with terms of five years or less; they increased from 16.4% from 2017-2019 to 26% from 2020-2022.
Since 2022, multifamily property performance has been edging lower, according to Freddie Mac. Rent growth has been slowing and expenses increasing, which causes net operating income growth to decline. The rate of growth for net operating income has slowed to 2.4% in the past year.