Downward angle icon Downward angle icon. Kena Betancur/VIEWpress Bloomberg reported that delinquent assets are outpacing investment vehicles that bundle risky commercial real estate debt. One report said non-performing rates for secured loan obligations rose 440% in the 12 months through January. Issuers are extending maturities and buying back delinquent loans.
Bloomberg reported that investment vehicles made up of risky commercial real estate debt are in an increasingly difficult position as distressed assets make up a large proportion of their mix.
The share of these secured loan obligations that are non-performing is now four times higher than it was seven months ago, accounting for 7.4% of such instruments. CLO non-performing rates soared more than 440% in the 12 months ending in January, according to a report by CRED iQ.
Outstanding CRE loans make up an estimated $80 billion of the market, and some issuers are already suffering losses.
CLOs work by bundling together short-term loans for property renovations and expansions, a type of speculative debt that banks and typical mortgage-backed securities often avoid.
It's a market that has boomed during the pandemic as remote work has boosted demand for apartment renovations. Between 2019 and 2021, CLO issuance surged from $19 billion to $45 billion, according to Bloomberg research.
But rising interest rates and sluggish demand for office space are making it increasingly difficult for borrowers to manage their debt.
Like the broader commercial real estate market, this is prompting issuers to extend maturities and restructure loans in ways that are more favorable to borrowers, such as two- or three-year extensions in exchange for more capital, according to Bloomberg.
Other banks have been using their cash reserves to buy up delinquent loans, buying a record $1.3 billion last year, according to JPMorgan estimates cited by the outlet, after buying just $480 million in 2022.
The CLOs' problems reflect a larger theme in commercial real estate, where even investment-grade projects are facing debt concerns: Office delinquencies, for example, jumped from 5.1% to 6.5% in the fourth quarter.
The industry's problems appear to be getting worse, with some warning it could be on the brink of a $2.2 trillion wave of hardship over the next few years.
Still, CLO managers are expressing some optimism despite the low level of originations, Barclays wrote in mid-March.
“We see the decline in bank lending as a positive for deal volumes, with many also expecting real estate transactions to increase in 2024,” the bank said. “We continue to expect year-over-year growth to be very limited, with issuance forecast to remain at just $10 billion in 2024.”