The losses on troubled CMBS loans has escalated by 33% over the past year, with recovery around 43 cents on the dollar. Many analysts expect losses to continue an upward climb this year, or in other words declining property values mean increasing loss severities.
The average loss severity rate for CMBS loans resolved in 2009 was 57% compared to a rate of 43% in 2008. The cumulative historical average is 37.2%. Analysts with Fitch Ratings expect the loss severities to remain above the cumulative average through 2011.
Assets liquidated today will be those unlikely to see a cash flow improvement as a result of an extension or modification. Concurrently, special servicers are continuing to see a high volume of underperforming loans further slowing the process for resolution (think high stakes divorce proceedings). With a continual stream of excess inventory and a declining frequency of modifications, there appears to be no relief in sight.
In a booming market, a collateral liquidation could recover fully the interest shortfalls and possibly even the total outstanding balance. But in today’s environment, where commercial real estate values are well below the 2007 peak, it will take much longer to return to the value at the time the loan was secured.
A study conducted by CoStar Group showed that among liquidated loans, 91% of properties had at least one reappraisal done and 87.5% of those experienced a reappraisal value lower than at the time of securitization, triggering appraisal reductions for those assets with loan amounts more than 90% of the new appraisal value.
During the First Quarter of 2010 there have been $270 million in losses through liquidation. Among the $17.7 billion in loans added to special servicing this year thus far, 7% saw appraisal reductions. This means the rate of loss severity is sure to worsen.
Certain property types are expected to yield higher loss severities than others. Here’s the breakdown for 2009:
- Retail – 48.2%
- Industrial – 48.8%
- Office – 56.9%
- Multifamily – 58%
source: CoStar
