Commercial properties in the U.S. may have lost as much as 25 percent of their value as the impact of the coronavirus has taken its toll on hotels, malls and other commercial buildings.
The Financial Times (FT) reported the evidence of the losses can be seen in the commercial mortgage-backed securities (CMBS) market from appraisals. As a result, it raises questions over the value of these properties as collateral backing commercial mortgages.
Wells Fargo reported the properties at risk have lost an average of 27 percent of their value. Typically, new appraisals are ordered when a commercial property owner falls behind in mortgage payments.
“It’s a big number,” Lea Overby, an analyst at Wells Fargo, told FT. “This is material.”
Hotels have been especially hard hit as travel has diminished amid COVID-19 shutdowns, with many operators reporting single-digit occupancy rates.
For example, the value of a Crowne Plaza hotel in Houston fell by 46 percent compared to six years ago. The newspaper reported the hotel has not made a mortgage payment since March.
In another case, the Holiday Inn La Mirada, near Los Angeles, was recently valued at $22 million — a 27 percent dive from 2015. It has missed mortgage payments since April.
“The numbers themselves are atrocious,” Gunter Seeger, a fixed income portfolio manager at PineBridge Investments, told FT. “A 30 percent markdown in appraisals pretty much across the board is horrific.”
Earlier this month, the nation’s banks were anxious about getting loans repaid that are secured against empty office buildings, hotels and malls.
Disclosure of these so-called criticized loans, which are warning signs about a borrower’s ability to pay, revealed of the 10 banks that have seen the largest increases, criticized loans have risen by 62 percent in the second quarter.
Criticized commercial real estate loans soared by 144 percent, to $26 billion, according to an analysis by the Financial Times.
The banks with the largest total increases include J.P. Morgan Chase, Bank of America and Wells Fargo, the report said.
“People are looking pretty closely at criticized loans, particularly CRE [commercial real estate] loans,” Brian Foran, a bank analyst at Autonomous Research, the London-based independent research firm covering the financial services industry, told FT, “Because they’ve looked around the city and noticed it’s pretty empty.”