Distress Levels in Property-Backed Loans Rise, Reaching $1.4 Billion for Multifamily

Multiple measures show increased delinquency rates in commercial real estate collateralized loan obligations, better known as CRE CLOs.

While office property leads with the highest proportion of distressed loans, multifamily real estate shows the greatest distress by dollar amount with about $1.4 billion in distressed funds, according to an analysis by CoStar News. That’s nearly half of all delinquent loans and an outstanding balance more than 6.5 times larger than office.

Increases in the amount of CRE CLO distress highlight the challenges posed to lenders and borrowers taking advantage of then historically cheap financing following the pandemic, only to have their floating-rate loans balloon. They now face those loans coming due in a time of muted property performance, including declining rents, higher operating costs and increased insurance premiums.

CRE CLOs are pools of short-term, often floating-rate, loans made mainly by nonbank lenders. The loans are typically originated on newly built properties or those going through a transition to reach stabilized cash flow. They pose risks to investors who can buy into portions of the pooled loans when those properties run into financial trouble.

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