KBRA Says CMBS Appraisal Reductions Are Climbing

(Illustration credit: KBRA, Trepp)

Kroll Bond Rating Agency, New York, reported that commercial mortgage-backed securities appraisal reduction amounts–ARAs–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%,” KBRA said in a new report, CMBS ARAs: Trending Higher. “ARAs totaling $1 billion (98 loans) were effectuated during 2023, while the year-to-date June 2024 total almost matched this figure, with $842.6 million of new ARAs across 95 loans.”

The report said ARAs totaling $5 billion are in effect across 355 loans with an outstanding principal balance of $11.8 billion as of June 30. This compares to June 2023, when ARAs totaled $4.2 billion, meaning there has been a 20% annual growth rate from a year ago.

“With lower conduit CMBS coupon loans maturing in an environment with higher interest rates, declining property prices and weak commercial real estate deal volume, delinquencies and ARAs are expected to continue to rise,” KBRA said. “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-plus days late, in foreclosure, real estate owned 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,” KBRA said.

The rapid rise in ARAs indicates an increase in expected losses will follow, KBRA noted. “Based on our review of CMBS 2.0 conduit realized losses, approximately 85% of the loans with losses by balance are associated with ARAs.”