By the Numbers

CRE CLO distress and delinquencies rise sharply into year-end

Mary Beth Fisher, PhD | 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

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