By the Numbers

Collateral performance in CRE CLOs still looks solid

Mary Beth Fisher, PhD | April 28, 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. This material does not constitute research.

The collateral for commercial real estate collateralized loan obligations (CRE CLOs) typically are short-term, floating-rate loans for properties undergoing major renovations or repositioning. Although financing these projects can be riskier than lending against stabilized properties, the overall performance of CRE CLO collateral through the pandemic has been much better than broader CMBS. Since the Fed began hiking, performance has declined modestly but remains in line to somewhat better than non-agency CMBS. There are a couple of catches to the apparent outperformance though: the overall collateral profile is overweight multifamily and underweight both lodging and retail, and loan modifications, extensions and buyouts—difficult to uniformly track in CRE CLOs—could be masking some trouble spots.

The performance of CRE CLOs overall continues to be solid. Delinquency rates peaked during the pandemic at 1.75% of loans delinquent by 30 days or more and close to 3% of loans with non-current payments (Exhibit 1). After declining from early in the pandemic through the second half of 2020, delinquency rates stayed mostly below 0.5% into early 2022. As the Fed hikes raised rates on floating-rate loans, non-current loans and delinquency rates began to pick up: about 2% of CRE CLO collateral is non-current, with 0.75% being 30 or more days delinquent. The “past due” and “less than 30 days delinquent” categories do pick up some noise, but monitoring these categories is an important precursor to loans that will transition to delinquency. These categories also arguably reflect some degree of borrower stress when payments are late.

Exhibit 1: CRE CLO loan performance summary

Note: Summary performance for loans originated since 2018 only. Performance through March 2023.
Source: Intex, Santander US Capital Markets

Not surprisingly, the large increase in delinquencies during the pandemic was mostly from hotel and retail properties in CRE CLOs (Exhibit 2). Both property types had serious delinquency rates over 2% and accounted for most of the foreclosures. Retail properties in CRE CLOs continue to struggle, and currently have the highest delinquency rates across property types of 1.5%. Multifamily has performed exceptionally well, though recently there has been a noticeable build to 2.5% of loans that are past due or less than 30 days delinquent.

Exhibit 2: CRE CLO performance by property type

Note: Summary performance for loans originated since 2018 only. Performance through March 2023.
Source: Intex, Santander US Capital Markets

CRE CLO performance has been stronger than that of non-agency CMBS overall. One factor contributing to the relative strength is that investor demand and willingness to take on struggling commercial real estate properties has shaped the collateral pool of CRE CLOs. Thanks to a strong fundamental outlook, substantial price appreciation and outperformance during the pandemic, the collateral profile of CRE CLOs has shifted heavily towards multifamily over the past few years, and away from the pandemic-impacted sectors of the market: hotels, retail and office (Exhibit 3). Multifamily started off being about 25% to 30% of CRE CLO collateral in 2018 and has increased to over 50%, despite being only 22% of all non-agency CMBS (Exhibit 3). Office and mixed-use collateral began as roughly the same amount but has declined over time as multifamily has risen.

Exhibit 3: CRE CLO collateral has evolved over time

Note: The following property types have been consolidated: hotel and lodging (HT); manufactured, senior and multifamily housing (MF); special purpose and health care are included in other (OT); self-storage is included in warehouse (WH). Loans originated since 2018 only. Data thru March 2023.
Source: Intex, Santander US Capital Markets

The retail sector has been struggling for nearly a decade, and its presence in CRE CLOs is small. It comprises about 3% of outstanding collateral in CRE CLOs but 15% of collateral across all non-agency securitized products (Exhibit 4). Hotels had the highest delinquency rates of any property type during the pandemic, and not surprisingly make up only a small slice of CRE CLOs post-pandemic, despite being 12% of outstanding non-agency CMBS overall.

Exhibit 4: Non-agency CMBS and CRE CLO collateral

Note: Collateral outstanding in non-agency CMBS and CRE CLOs. Data as of March 2023.
Source: Bloomberg, Santander US Capital Markets

Despite the additional risk of transitional lending, the performance of CRE CLOs has been better than the broader non-agency CMBS market in part due to the collateral mix (Exhibit 5 and 6). Overall, 98% of outstanding CRE CLO loans are current, while 2% are non-current. Half of the non-current loans (1.08%) are past due or less than 30 days delinquent, while the other 0.92% are 30 or more days delinquent.

Exhibit 5: Loan payment status of CRE CLO collateral

Note: Data updated through 4/27/2023; latest monthly release is 3/1/2023.
Source: Intex, Santander US Capital Markets

This performance is in-line to much stronger than that of non-agency CMBS, where over 3% of outstanding balances are delinquent (Exhibit 6). The enormous spike in delinquency rates during the pandemic was mostly driven by lodging and retail properties. Notably, CMBS loans in forbearance were typically considered delinquent until the forbearance was cured. As these loans became reperforming, the delinquency rates dropped steadily and sharply, and there was virtually no build up of properties in foreclosure or real estate owned (REO).

Exhibit 6: Non-agency CMBS and special servicing rates

Note: Delinquency data includes non-agency CMBS and SASB. The CMBS and SASB data includes all loans made prior to 2018, so not an apples to apples comparison to CRE CLO delinquency and defaults, which cover a much narrower data set.
Source: CREFC, Intex, Trepp

Loan modifications, extensions and buyouts, which are difficult to uniformly track in CRE CLOs, could be masking some of the issues. For example, CRE CLO managers could allow forbearance, and, similar to Freddie Mac or Ginnie Mae, continue to consider the loan payment status as current while it was in forbearance. Managers also have incentives to replace or buy out delinquent or underperforming loans. As transitional borrowers work to stabilize and possibly sell their properties, or need to refinance out of floating-rate loans, it’s possible there will be further deterioration in performance.

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

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.