By the Numbers

Modest signs of stress begin to emerge in CRE CLOs

| March 3, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Investors on the lookout for deterioration in commercial real estate have been keeping an eye on commercial real estate collateralized loan obligations (CRE CLOs), but performance remains relatively robust. CRE CLOs are particularly credit and rate sensitive, as the collateral is comprised of bridge or transitional loans for properties that are being heavily renovated, repositioned or repurposed. The loans are floating-rate and often require interest rate caps, which has dramatically increased the cost of debt service since the Fed began hiking. But 97% of outstanding CRE CLO collateral remains current on its payments. And the 3% of loans that have missed payments are mostly in the early stages of delinquency, with outsized representation from office properties.

Of the $115 billion CRE CLO collateral currently outstanding, nearly half is multifamily (49%) with office being the next largest property type at 29% (Exhibit 1). Three percent of loans were not current as of their January 2023 payment, with the bulk of those loans (2.32%) past due or less than 30 days delinquent. Early stage delinquencies are dominated by office properties, where over 60% of loans past due or less than 30 days delinquent are office. Overall, 5.4% of outstanding office CRE CLO collateral is not current, compared to 2.5% of multifamily and 2.4% of healthcare properties.

Exhibit 1: CRE CLO performance weighed down by office

Note: Amounts in millions. Loans with unidentified property type were excluded. Data as of January 2023.
Source: Intex, SCIB US

Among CRE CLOs with any delinquencies in January, the percent of collateral non-current averages 7%, with a range from a low of 1% to a high of 85% (Exhibit 2). The deals with high percentages of non-current loans tend to be seasoned deals from 2019 where a lot of the original collateral has paid off.

Exhibit 2: CRE CLO deals with non-current loans

Note: Amounts in millions. Data as of January 2023.
Source: Intex, SCIB US

It’s unclear if these CRE CLO delinquencies portend a rise in CMBS delinquencies more broadly. The current CMBS delinquency rates reported by Trepp have been stable to declining for over a year, with a CMBS delinquency rate of 2.94% in January, and multifamily delinquencies declining below 2%. However, those CMBS delinquencies are heavily skewed towards loans 60+ days delinquent, with only 12 bp of loans in the 30-day delinquent bucket.

Long-term delinquencies in CRE CLO deals are relatively rare, since delinquent or troubled loans tend to be bought out of the trust quickly by the sponsor. The sponsor typically retains the bottom 15% to 20% of principal exposure, and delinquent loans can trip credit triggers that could result in ratings downgrades. It’s to the benefit of the sponsor to buy out the loan quickly and resolve it.

The risk profile between CRE CLOs and standard CMBS also varies. Conduit CMBS is entirely fixed-rate and historically has had 10-year terms. A few recent new issue conduit deals have come as 5-year deals and more are expected, though the loans are still fixed-rate. Single-asset single-borrower (SASB) deals have historically been a mix of 5- to 10-year maturities with some fixed- and some floating-rate. However, all but one SASB deal issued in 2022 were floating rate, so the costs for those borrowers have risen as well.

The vast majority of the 3% of non-current CRE CLO loans are in the early stages of delinquency. Whether they will be brought current, obtain modifications or transition to non-performing loans is worth monitoring over the next few months, as it could be an early warning signal for CMBS credit quality more broadly.

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

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