CMBS Challenges are Back from the Dead

CREDiq analyzed 556 properties that were reappraised in 2023 and the results are shocking. The Commercial Mortgage-Backed Security (CMBS) loans analyzed were attempting to work through problems. CREDiq only analyzed non-current CMBS loans, not bank or life company loans. Banks hold about 50% of all Commercial Real Estate (CRE) debt, and CMBS accounts for around 15% of those. Trepp found that 4.5% of all CMBS loans are delinquent beyond 30 days. This means if the total CMBS market is $693B, then $21.6B in CMBS loan dollars are in default.

The CREDiq analysis concluded that troubled office and retail real estate loans over $50M have lost almost 60% of their value! The timing could not be worse. To refinance or extend a loan, borrowers will be asked to inject more equity. Not just a little more equity, a lot more.

I don't see many of these loans getting “worked out” between the borrower and the lender. Losses will be taken.

Here is an example of how a refinance might play out.

In this very basic example, the borrower will have to come up with $40.7M in equity to refinance the loan. That is more than the original equity. We should not expect many of the CMBS default loans to get refinanced. Expect them to hit the market and be bought at serious discounts.

Appraisals

The CREDiq valuations are evaluated based on appraisals. Those who use appraisals as a valuation tool know it is subjective. When times are good, appraisals stretch to meet a number to close the loan. When banks are appraising an existing loan during a CRE downturn, the tendency is to overcorrect on the downside. Only the market knows the real value, and that's where timing plays a critical role in valuation.