By the Numbers

CRE CLO distress and delinquencies rise sharply into year-end

| January 5, 2024

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.

A lot of bad news has been priced into commercial real estate securities, some of it months before credit fundamentals showed significant deterioration. Performance deterioration in CRE CLOs accelerated at the end of 2023, as delinquency rates rose sharply. Multifamily delinquencies doubled the last two months of the year and the trend is clearly negative for the near-term. Office delinquency rates also rose, but show curious signs of stabilization, which may be particular to the CRE CLO sector. The bandwidth for sponsors to buy troubled loans out of pools may be constricted going forward, as delinquency rates are likely to continue rising through the middle of 2024.

Collateral performance in CRE CLOs deteriorated throughout 2023 with stress and delinquency rates rising sharply the final two months of the year (Exhibit 1). The proportion of loans that are arguably under stress—that is, past due or less than 30 days delinquent—had been steady at about 1% throughout 2021 and through most of 2022. Actual delinquencies during that period remained low, hovering at or below 0.50% of collateral (Exhibit 2).

Exhibit 1: Stress rises in CRE CLO collateral

Note: Data through December 2023. About 9% of performance data had not yet been reported as of 1/4/2024, so December numbers could change.
Source: Intex, Santander US Capital Markets

December 2022 saw the first sharp jump in delinquency rates of this cycle, when rates about doubled from 0.50% to 1.0%. Since then, the proportion of loans under stress has risen from 1% to 3%, with actual delinquencies rising from 1% to nearly 3.5%. The sharp increase in delinquency rates in November and December of 2024 has resulted in CRE CLO collateral performance being worse now than it was at any time during the pandemic.

Exhibit 2: Delinquencies in CRE CLO collateral

Note: Data through December 2023. About 9% of performance data had not yet been reported as of 1/4/2024, so December numbers could change.
Source: Intex, Santander US Capital Markets

About 70% of CRE CLO collateral is multifamily, and it has been largely responsible for the large jump in delinquency rates going into year-end (Exhibit 3). Multifamily delinquency rates rose from just below 2% to well over 3% in the final two months of the year. Stress in the multifamily sector mirrors the CRE CLO pool overall, with over 3% of loans now past due or less than 30 days delinquent.

Exhibit 3: Multifamily delinquencies in CRE CLO collateral

Note: Data through December 2023. About 9% of performance data had not yet been reported as of 1/4/2024, so December numbers could change.
Source: Intex, Santander US Capital Markets

Office delinquencies are rising but signs of stability emerge

The long-predicted wave of office delinquencies also gathered more steam late in the year, including in CRE CLOs (Exhibit 4). The delinquency rate for office properties in CRE CLOs rose to a historical high of 8.0% in December 2023. Stressed collateral added another 2%, leaving the overall rate of distressed plus delinquent collateral at 10%. But what’s also important to note is that the trend of stressed office collateral in CRE CLOs has been declining since September, from 6% down to 2%. That could mean that office delinquency rates may be near their peaks and could begin falling while multifamily rates continue rising.

Office properties currently comprise about 14% of outstanding CRE CLO collateral. These signs of stabilization – assuming they persist – are encouraging, but may be particular to transitional loans and the CRE CLO vehicle for two reasons:

  • Sponsors can aggressively buy out or exchange troubled loans from the pool, so the peak delinquency rate could arguably be lower in CRE CLOs than in other CRE securities.
  • Office properties that are being renovated and repositioned may also fare better than older buildings in conduit deals when seeking new tenants and new financing.

Exhibit 4: Office distress and delinquencies in CRE CLO collateral

Note: Data through December 2023. About 9% of performance data had not yet been reported as of 1/4/2024, so December numbers could change.
Source: Intex, Santander US Capital Markets

The overall rise in distressed and delinquent loans is not unique to CRE CLOs, as it has been occurring across the spectrum in commercial real estate. There is evidence, not shown here, that delinquencies also accelerated sharply in agency multifamily loans during the final months of 2023, though their overall performance continues to be stronger.

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.

Important disclaimers for clients in the EU and UK

This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.

This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.

This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.

This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.

The Library

Search Articles