KBRA Releases Research – CMBS ARAs: Trending Higher
August 14 2024 - 1:19PM
Business Wire
KBRA releases research on appraisal reduction amounts (ARA),
which have climbed in tandem with delinquency rates. After a 60%
drop in effectuated ARAs in 2022, ARAs climbed in 2023 and 2024 as
delinquencies increased 84%. ARAs totaling $1 billion (98 loans)
were effectuated during full-year (FY) 2023, while the year-to-date
(YTD) June 2024 total almost matched this figure, with $842.6
million of new ARAs across 95 loans. As of June 2024, ARAs totaling
$5 billion are in effect across 355 loans (outstanding principal
balance of $11.8 billion). This compares to June 2023 when ARAs
totaled $4.2 billion for an annual growth rate of 20%.
With lower conduit CMBS coupon loans maturing in an environment
with higher interest rates, declining property prices, and weak
commercial real estate (CRE) deal volume, delinquencies and ARAs
are expected to continue to rise. The combination of increasing
delinquencies and the potential assignment of ARAs to existing
delinquent loans could significantly amplify ARAs in 2024 and 2025.
Notably, nearly one-third of seriously delinquent loans by loan
balance (90+, foreclosure, real estate owned (REO), and
nonperforming matured balloons) do not have ARAs. Based on the
current pace of ARA activity and the trajectory of CMBS 2.0
delinquencies, new ARAs are on track to surpass and potentially
double 2023 levels. The rapid rise in ARAs indicates an increase in
expected losses that will follow.
- As of June 2024, retail and office properties represent 75% of
total ARAs, at 42.5% and 33.2%, respectively.
- The average ARA as a percentage of loan principal balance is
42.5%, with retail and office above average at 47.2% and 46.1%,
respectively, and industrial at the lowest with 25.5%.
- ARAs as a percentage of loan balances are similar across loan
sizes, including those with balances less than $25 million, $25
million-$50 million, and greater than $50 million (large loans) at
43.4%, 43.1%, and 41.7%, respectively.
- For disposed loans, approximately one-half of the loans (43.7%
by count) had ARAs within ±10% of their actual realized losses;
72.4% were within ±20%; and less than 4% (14 loans) varied by
±50%.
- New York has the largest state ARA exposure of $1.2 billion
(23.3% of total ARA balance) represented by 79 loans (22.3% by
count). This is followed by Illinois and Texas with $0.58 billion
and $0.50 billion, respectively, with these three states accounting
for 45% of total ARAs outstanding.
Click here to view the report.
Related Publications
- KBRA CMBS Loss Compendium Update: June 2024
- Appraisal Values of Distressed Loans Highlight CMBS Stress
- CMBS Loan Performance Trends: July 2024
- CMBS Trend Watch: July 2024
About KBRA
KBRA is a full-service credit rating agency registered in the
U.S., the EU, and the UK, and is designated to provide structured
finance ratings in Canada. KBRA’s ratings can be used by investors
for regulatory capital purposes in multiple jurisdictions.
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Larry Kay, Senior Director +1 646-731-2452
larry.kay@kbra.com
Aryansh Agrawal, Senior Analyst +1 646-731-1381
aryansh.agrawal@kbra.com
Roy Chun, Senior Managing Director +1 646-731-2376
roy.chun@kbra.com
Business Development Contact
Andrew Foster, Director +1 646-731-1470
andrew.foster@kbra.com