Market Overview

KBRA Publishes CMBS Research: CMBS 2.0 Appraisal Reduction Amounts on the Rise; Losses to Follow

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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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About KBRA and KBRA Europe

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.

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