According to a report by Kroll Bond Rating Agency, there was a significant drop of 60% in effectuated appraisal reduction amounts (ARAs) on CMBS loans in 2022. However, as delinquencies increased by 84%, ARAs saw an upward trend in both 2023 and 2024. In fact, during the full year of 2023, $1 billion worth of ARAs were effectuated across a total of98 loans. This figure was almost matched by the year-to-date June total for2014 which amounted to $842.6 million across95 loans.
Fast forward to June2014 and we see that there are currently$5 billion worthofARAsin effectacross355loans with an outstanding principal balanceof$11.8billion.This is comparedtoJune2013 whenARAstotaled$4.2billion,resultinginanannualgrowthrateof20%.
KBRA reported that due to lower conduit CMBS coupon loan maturities occurring at a time when interest rates are rising along with declining property prices and weak commercial real estate deal volume,the number of delinquenciesand ARAsshould continue increasing.“The combinationof these factors could significantly amplify ARA activityinthe years ahead.”
In terms offuture potential reductions,KBRAnotedthat nearly one-third ofs eriouslydelinquentloansbyloanbalance do not have any existing ARAs.However,basedoncurrentARAactivityandthetrajectoryCMBS2 .0delinquencies,newARAsshowpromiseto surpass or even double levels seen in previous years.“This rapid increaseindicatesanexpectedriseinelosses.”
