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Losses From Distressed CMBS Loans Tripled In May, Report Finds

The Hilton Houston Galleria, located at 6780 Southwest Freeway in Houston.

Holders of CMBS loans experienced a spike in losses last month as a series of distressed properties sold for a fraction of their prior value. 

Twenty-two of the 34 distressed properties that went through workouts last month, including disposition, liquidation or discounted payoffs, incurred losses for investors, according to a report from CRED iQ. The $263M lost in May was more than triple April’s total losses of $75M.

The properties that incurred losses in May were largely retail and lodging, plus a few severely distressed office properties getting resolved, according to the report. 

The most significant loss came from One AT&T Center, an office building in St. Louis that the telecom firm vacated in 2017. Investors took a 100% loss on the $107.1M in outstanding debt. The property sold for $4.1M in May.

A loan backed by the Hilton Houston Galleria, a hotel near one of the city's largest malls, experienced an 84.4% loss severity. Another loan backed by a Texas property, The Shops at Willow Bend, went delinquent in January 2020 and incurred a 78.3% loss. 

In Massachusetts, the Emerald Square Mall, formerly owned by Simon Property Group, has been in special servicing since September 2020 and resulted in a $72.5M in principal losses, the second-highest total loss of the month. That follows Simon Property Group CEO David Simon  telling his investors in an earnings call last year the REIT would give up on malls where they couldn't make a deal, wishing the distressed properties' future owners "the best of luck."

In May, Steerpoint Capital Managing Partner ​​Bo Okoroji told Bisnow that of the 1,300 malls in the U.S. today, roughly 300 would remain as is and 300 would "go away," leaving the rest for investors to reposition through foreclosure or otherwise.

Meanwhile, some investors are worried the pandemic-related damage to loans backed by older office properties is only just beginning. While data from Trepp shows the CMBS delinquency rate overall has declined since its June 2020 peak, the rate for office properties specifically spiked at the beginning of 2022, putting that sector at the forefront of distressed debt investors' minds, JLL Capital Markets Vice President Kyle Kaminski told Bisnow in January

"Office in general has now replaced hotels as the new, ‘What do we do here?’" Kaminski said. "There’s this view that office has to have some level of distress, that it’s going to cause pain points in most markets.”

Last month, office properties had the highest total outstanding debt payoff of any property type, led by the retirement of Blackstone's $1.3B mortgage backed by its BioMed portfolio, according to CRED iQ's report. 

Related Topics: CMBS, CMBS delinquecy, CRED iQ