Vinny,
I was using "value destruction" more in terms of commercial real estate which is primarily valued by cap rate.
So let's take a building with an annualized Net Operating Income of $1MM.
At a 5% cap rate it would be worth around $20MM.
At a 7% cap rate the same building is now worth around $14MM.
That's a 30% difference in value.
5% cap rates were very common over the past few years.
If said building was leveraged at 70%, at the previous valuation there's $14MM of debt on it, meaning it's teetering on the edge of being upside down in today's market. In fact, if the seller sold it at a 7% cap today, after selling and closing costs he/she would be upside down.
Now, as a practical matter, if the loan was rate locked at a low rate, so long as the tenant occupancy is intact, the property is presumably cash flowing, so the owner could hold it until market conditions improve.
Of course this assumes there is no ratio covenant that the lender has baked in to protect themselves from deteriorating collateral value.
Anyway, I'm in the weeds, but you can see what I mean by asset value destruction in just a 2% cap rate move. Imagine if the spread grows. And imagine that scenario across millions of commercial buildings.