Office and retail valuation drops are becoming like accident scenes, where so many watch and find it hard to turn away. Trepp recently reported that January valuations for CMBS-office backed loans were 52% to 60%.
CRED iQ reviewed 190 appraisals of major properties across all assets classes to determine the impact of current market conditions on asset values. Retail and office led the declines, with an average 41.2% valuation decline in $10 billion in assets. Retail was down 57% while office was on its heels at 48.7%.
Other drops were 41.9% in mixed-use, 22.0% in multifamily, and 21.2% for industrial. The only good news in valuation was self-storage, which remained flat with no decline.
CRED iQ pointed to a number of examples:
- The tower at 229 West 43rd Street in Manhattan — Times Square, that is — which is a 248,457 square foot retail and condo combination, lost $386 million in valuation.
- The Gas Company Tower, a 1,377,053 square foot tower in Los Angeles, saw a $362 million valuation drop from $632 million to $270 million, a 57.3% loss.
- Woodbridge Center in Woodbridge, New Jersey, a 1.1 million square foot regional mall, went from $366 million to $86 million, or 76.5%.
- Denver’s 1.2 million square foot Wells Fargo Center declined by $188 million.
- The JW Marriott in Chicago had the distinction of being the only non-retail or office property to make the worst-performing list. The 610-room hotel had a $136 million valuation decline.
As CRED iQ said, in a seemingly understated way, “the analysis highlights the need for continued monitoring of real estate assets and their exposure to changing market conditions. The appraisals were based on sales and leasing data from CRED iQ, and other reliable sources.”
A number of questions present themselves. Has a sudden change potentially breached loan-to-value covenants? If refinancing is needed, what would be required in terms of additional capital, as tighter lending standards could make a massive increase in equity necessary? Are insurance or tax rates overvalued and possible open to a challenge? What would a sudden demand for additional capital do to the financial viability of a project? Are any other contracts possibly affected, with other covenants at risk?