Commercial Property in the US Has Lost 1/4 of its Value Due to the Pandemic
The value of US commercial real estate had dropped by a quarter or more due to the pandemic's economic impact, the Financial Times reported, revealing the extent of damage to US shopping malls, hotels, and other commercial buildings.
Recent assessments of the commercial mortgage-backed securities (CMBS) market have raised questions about the collateral value that backs commercial mortgages throughout the financial system.
According to Wells Fargo, the average writedown rate for distressed real estate assets is 27%. The new assessments are triggered when commercial property owners start to struggle to pay their mortgages. The loan would be transferred to a "special servicer" that could eventually seize the property on behalf of the CMBS holder.
Recent examples suggest that hotels were ongoing particularly hard hits, given the volume reduction in tourism and business travel.
Crowne Plaza Hotel in Houston was valued at $25.9 million this month, a 46% decreased in value compared to 2014 when it was bundled into a CMBS deal. The mortgage of the hotel had not been paid since March. Under similar circumstances, Holiday Inn La Mirada, about a 20-minute drive from downtown Los Angeles, was recently valued at $22.1 million, a 27% decreased in value compared to 2015.
"The numbers are bad," Gunter Seeger, a fixed-income portfolio manager at PineBridge Investments, said, "almost all the appraisals are at a 30 percent off ‘discount’, which is scary." The number of newly assessed properties is accelerating. Wells Fargo's analysis covers 116 struggling properties tied up in CMBS that have been recently evaluated.
Retail tenants are having a hard time because of forced closings and weak economic situations. Banks are raising reserves to cover potential property losses this year. The number of commercial real estate loans flagged by US banks as potentially problematic surged in the second quarter.
CMBS investors, meanwhile, have been keeping a close eye on appraisal values to assess their risk of loss. Over the past four years, the average loan-to-value ratio of mortgages bundled into CMBS has been below 60%, giving investors a sizable cushion. However, the pandemic has eroded the cushion considerably, causing an average loan-to-value ratio of multi-equity CMBS close to 90 percent.
"We are going to have a valuation problem if this crisis goes on," said James Shevlin, president of CW Capital, a special services firm. Analysts said that in the current environment, accurately evaluating a property will be a challenge.
"There is too much uncertainty right now," said Alan Todd, an analyst at Bank of America, “there could be a very high margin of error."