Commercial real estate tremors reverberate in CLO space
An obscure investment product used to finance risky real estate projects is facing unprecedented stress as borrowers struggle to repay loans tied to commercial property ventures.
Known as commercial real estate collateralized loan obligations, or CRE CLOs, they bundle debt that would usually be seen as too speculative for conventional mortgage-backed securities into bonds of varying risk and return.
In just the last seven months, the share of troubled assets held by these niche products has surged four-fold, by one measure, to more than 7.4 percent. For the hardest hit, delinquency rates are in the double digits. That’s left major players in the $80 billion market rushing to rework loans, while short sellers are ramping up attacks on publicly traded issuers they say may be so beset by missed payments that they have little to no equity value.
The pain is part of a broader shakeout in the $20 trillion US commercial real estate market, which nearly brought down New York Community Bancorp and has elicited warnings from Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell. Yet industry observers say few products are more exposed than CRE CLOs.
That’s because they’re primarily stuffed full of short-term, floating-rate loans for properties undergoing renovations or expansions, the type of risky debt that banks or CMBS often don’t want to hold. With rising interest rates eroding resale prices for refurbished multifamily dwellings and demand for office space still tepid, many borrowers are starting to struggle to meet their obligations. That’s left a number of CRE CLO issuers – which finance the riskiest part of the structures themselves and sell off the safer pieces – already absorbing losses.
Some say the
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