NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) releases a research report entitled, “CMBS 2.0 Appraisal Reduction Amounts on the Rise; Losses to Follow.”
With CMBS 1.0 winding down, CMBS 2.0, is starting to take on a life of its own. The specially serviced CMBS 2.0 conduit rate has been on the rise for eight consecutive months ending June 2018 at 1.24%.
Appraisal Reduction Amounts (ARAs) have followed suit, and recently have begun to climb. ARAs are considered by some market participants to be a proxy for expected loan losses. During 1H 2018, $828 million of CMBS 2.0 specially serviced conduit loans had ARAs effectuated. This is already 65% higher than FY 2017 when it was $501 million.
In total, there were $229 million of ARAs initiated in 1H 2018 compared to $135 million FY 2017. In addition to the $229 million of ARAs, there is another $396 million of ARAs outstanding as of June 2018, for a total of $625 million. Through June 2018, there has been $184.1 million of realized losses for CMBS 2.0 conduits. The rapid rise in ARAs may be a harbinger of increased stress that’s working its way into CMBS 2.0.
As we get further along in the commercial real estate credit cycle, rents and prices have shown signs of slowing and in some markets, even declines. While properties were able to take advantage of a rising tide, some are getting caught in the undertow as a result of additional supply, store closures, and other tenant issues.
The potential effects of ARAs on trust certificates, including a change in controlling class, are discussed in the report. A table detailing the top ten transactions with the largest ARAs (as a percentage of the transaction’s outstanding principal balance) are also included in our report.
Please feel free to reach out to us with any comments or questions on our analysis. To view the report, please click here.
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KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.