Moody’s: CMBS Loss Severities Drop

Moody’s, New York, reported U.S. commercial mortgage-backed securities had the lowest loss amount last year since 2009, but noted loss severities remained elevated.

Last year, 156 loans were liquidated with a total loss of $1.6 billion, the lowest annual loss amount since 2009, Moody’s said in its 2022 Loss Severities Report. The annual loss severity “remained elevated” at 53.3%, the report said.

“CMBS 2.0 overtook CMBS 1.0 in both liquidation count and loss amount,” Moody’s reported. Last year 110 CMBS 2.0 loans were liquidated with a total loss of $876.6 million and an average loss severity of 43.9%, compared with 46 CMBS 1.0 loans liquidated with a total loss of $737.3 million and an average loss severity of 71.4%.

The retail sector was once again the largest loss contributor last year, but the office sector had the highest loss severity, Moody’s said. The $696.8 million loss from 58 retail loans liquidated in 2022 accounted for 43.2% of last year’s total losses. Among the five major property types, office had the highest annual loss severity at 73.9%, largely attributed to CMBS 1.0 office loans.

Moody’s said term defaults accounted for two-thirds of liquidations, with CMBS 1.0 maturity defaults accounting for more than 80% of the losses.

In a separate report, Moody’s said defeasance volume for collateral underlying CMBS jumped 28% last year to $32.2 billion, more than doubling 2020’s pandemic-era low and approaching the 2007 record high.

“Defeasance activity increased in 2022 but slowed throughout the year,” Moody’s 2022 Defeasance report said. “Defeasance volume slowed as rates increased.”

Moody’s said multifamily accounted for most defeasance at 68% of overall volume. “Steady multifamily cash flows and values allow loans to be easily refinanced or sold, which supported $21.8 billion of defeasance in 2022 within CMBS and Freddie Mac transactions,” the report said.

Defeasance volume among non-multifamily property types increased 35% year-over-year to $10.3 billion, Moody’s reported. “A large portion of the 2022 increase came from hotel defeasance, reflecting the sector’s strong rebound from the pandemic,” the report said. The average defeased loan size fell 6% in 2022 to $13.9 million, Moody’s said. Office and retail properties drove that decline with defeased loan sizes decreasing 25% and 40%, respectively.