The commercial mortgage-backed securities market is taking a beating.

As more and more CMBS borrowers default on their payments and send properties to special servicing, the appraisals on those properties have averaged about a 27% drop in value from when the loans were originated, according to Wells Fargo data reported by the Financial Times. A majority of the troubled properties that have been appraised are hotels and retail buildings.

“The numbers themselves are atrocious,” PineBridge Investments portfolio manager Gunter Seeger told FT. “A [nearly] 30% markdown in appraisals pretty much across the board is horrific."

The set of CMBS loans used for Wells Fargo's analysis comes from 116 properties that have been sent to special servicing since April 1, FT reports. Over half of the appraisals have occurred in the past month, and 101 of the properties are either in hospitality or retail. By May, $32B worth of CMBS debt, almost all of it in those two sectors, had already been sent to special servicing.

The struggles of both industries to rebound from the outbreak of the coronavirus pandemic have been well documented, but properties backed by CMBS debt have much less margin for error than those with more traditional loans. To compensate for that risk, the average loan-to-value ratio in CMBS has recently been about 60%, FT reports. Based on the new appraisal figures, Wells Fargo now estimates the average ratio is around 90%.

The next shoe to drop when CMBS loans go unpaid and get sent to special servicing is often a foreclosure, wherein the holder of the securities in question take official ownership of the property, and perhaps offers it up for sale as a distressed asset. So far, foreclosures have not caught up to the delinquency rate, but based on the scarcity of new loans and Blackstone Group's liquidation of its CMBS investment fund, industry confidence in a swift recovery is low.

The issue may also be more complex than an equation of properties losing value in a bad economy. A Securities and Exchange Commission whistleblower complaint in May alleged that financial institutions like Wells Fargo and Deutsche Bank had been systematically and fraudulently inflating the value of properties in CMBS loan packages — behavior strikingly similar to what precipitated the subprime mortgage crisis that collapsed the housing market in 2008.

Meanwhile, some major retail and hotel owners have ceased payments on certain loans even as they raise billions to invest elsewhere.

As a bad situation in the CMBS market looks likely to worsen, the industry has continued to apply pressure on the federal government to fund a bailout of commercial loans. So far, it has been to no avail.