Market updates and sector developments

Non-recoverable advance (NRA) determinations impacted US$2.7bn of US CMBS loans last year, representing an eye-watering 130% increase from year-end 2022, according to KBRA. NRA determinations can help limit potential losses if advances and interest on servicing advances are at risk of not being recovered upon asset resolution - a risk that rises in environments with declining or uncertain commercial real estate valuations. Against this backdrop, servicers have increasingly curtailed advances on delinquent CMBS loans, particularly on seasoned conduit deals where only a few loans remain outstanding.

Given the rise in the balance of loans with NRAs - which is expected to climb further in 2024 - KBRA reviewed recent trends across the US CMBS universe, comprising 1,017 transactions totaling US$628.6bn. The analysis found that although at year-end 2023 78 loans totaling US$2.7bn were determined to be NRAs, the overwhelming majority of distressed loans (90.3% by loan count and 93.3% by balance) have not had NRA determinations.

The 78 loans with NRAs are spread across 63 transactions that total US$25.8bn in principal balance. More than two-thirds (67.9%) of the NRA loans are from 2011 to 2014 vintage transactions. The majority of the remaining loans in these transactions are either past or nearing maturity, which is one of the considerations servicers generally use in determining advance recoverability.

Of the NRA loans, KBRA notes that the office sector makes up the largest percentage by balance (46.1%) and second by loan account (28.2%), while retail is second by balance (19.4%) and first by loan count (32.1%).

Overall, servicer advancing remains an important liquidity feature in the CMBS market. In total, 92.7% of the US$35.6bn of distressed loans with advancing needs have not been determined as NRA loans. The total outstanding advances on these loans was US$1.8bn, as of December 2023.

Corinne Smith