CMBS Loss Severities Tick Up; Retail’s Numbers Are Worst

NEW YORK CITY—Loss severities ticked up slightly for US CMBS year-over year in 2013 while the pace of loan resolutions fell, according to Fitch Ratings in its latest annual study of CMBS loan losses. The study, released Monday, showed that retail posted the worst numbers out of the major property types.

Average loss severities rose to 51.2% in 2013 from 50.5% in 2012. “Special servicers are continuing to resolve many over-leveraged CMBS loans with most of them still coming from the peak years of 2005-2007,” says Mary MacNeill, managing director at Fitch. The ratings agency expects the pace of CMBS loan resolutions to remain constant this year, while average loss severities should remain stable compared to 2013.

Special servicers resolved 872 loans last year, totaling $16.4 billion in Fitch-rated That represented a decrease of more than 28% by number when compared to the 1,219 loans totaling $16.6 billion resolved in 2012.

The average size of resolved loans jumped to $15.3 million from $9.2 million in 2012, hence the discrepancy between the 28% Y-O-Y drop in the number of loans and the far smaller decline in dollar volume. Last year, says MacNeill, “Special servicers were able to resolve many CMBS loans that had been languishing in special servicing for several years.”

Retail had the highest average loss severity at 62.1%, representing a 14.5% increase from the ‘12 loss severity of 54.2%. Eight of the 11 largest losses in ‘13 were retail properties, and all 11 resulted in losses of more than $50 million to their respective trusts, says Fitch.

As a case in point, Fitch cites the Promenade Shops at Dos Lagos (JPMCC 2008-C2) a 351,179-square-foot anchored retail property in Corona, CA, which had the greatest dollar loss of any securitized loan last year. The $125.2-million loan was liquidated after spending almost five years in special servicing.

“At its origination, the property was newly built with limited operating history,” according to Fitch’s study. “At origination of the transaction, the occupancy was 96% and the original as-is appraisal was $163 million. Prior to liquidation, the occupancy had fallen to 72.5% and the December 2011 appraisal was $32.4 million. The property was sold in July 2013 for $30 million. After accounting for advances, appraisal subordinate entitlement reductions (ASERs), fees and other unpaid amounts totaling approximately $41 million, the liquidation resulted in a loss severity of 108.2%.”

Hotels and multifamily showed the greatest decrease in loss severities compared to the year prior. 2013 loss severities for these property types were 36.8% and 36.8%, respectively, compared to 59.8% and 42.7%, respectively, in ‘012. Both properties types have recovered well since the downturn, says Fitch.

Resolution time for disposed loans increased to 30.4 months in 2013 from 23.3 months in 2012, as special servicers resolved many loans that had been in special servicing a number of years. Fitch says it expects resolution time to shorten as the inventory of older loans in special servicing has shrunk.

Three-hundred and sixty-six loans were resolved without losses—including losses less than 1.5%--while 506 resulted in losses of greater than 1.5%. Average loss severity for loans with losses was 51.2%, contributing to the cumulative loss severity of 47.7%.