Rising CLO Delinquencies Signal CRE Pain Ahead

The commercial real estate market is facing a new challenge as CLOs experience a significant rise in delinquencies.

Rising CLO Delinquencies Signal CRE Pain Ahead

The commercial real estate market is facing a new challenge as CLOs experience a significant rise in delinquencies.

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Good morning. The commercial real estate market is facing a new challenge as CLOs experience a significant rise in delinquencies. Meanwhile, despite optimistic job growth rates, cities like Austin have experienced pitfalls due to overbuilding

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Rising Delinquencies in CRE CLOs Signal Real Estate Pain Ahead

A niche financial tool for funding high-risk real estate projects is under severe strain as borrowers fail to repay commercial property loans.

Under pressure: Collateralized Loan Obligations (CLOs), pooling high-risk debts into bonds of varied risk, face a surge in distressed assets—up fourfold to 7.4% in just seven months. With delinquency rates hitting double digits, leaders in the $80 billion sector are rushing to modify loans as short sellers bet against issuers drowning in defaults, stripping them of almost all equity value.

The core issue: CRE CLOs are particularly vulnerable due to their composition of short-term, floating-rate loans for properties in transitional phases, like renovations or expansions. The rising interest rates diminish the resale value of these properties, worsening borrowers' ability to fulfill their financial commitments. This situation has led to noticeable losses for issuers of CRE CLOs, particularly those holding the riskiest parts of these financial structures.

Mitigate losses: In January, loans more than 30 days delinquent or in special servicing rose to 8.6%. Managers are extending maturities, allowing interest payments with additional debt, and modifying loans to encourage borrowers to meet obligations. Strategies include buying back delinquent loans, a practice that saw a record $1.3 billion in buyouts last year. Despite these efforts, concerns remain over the sufficiency of such measures to prevent wider financial impacts.


The path forward: The CRE CLO market is under a microscope as Arbor Realty Trust and Ready Capital grapple with rising delinquencies. Meanwhile, Blackstone Mortgage Trust reels from downgrades and short seller scrutiny, highlighting broader concerns over loan losses and market stability. This period is proving to be a critical test of resilience for the young CRE CLO industry amidst a volatile financial landscape.


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✍️ Editor’s Picks

  • Signs of stagflation: There’s growing concern over stagflation in the U.S. as Bank of America (BAC) predicts sub-2% growth and 3–4% inflation.

  • Developer aspirations: Scot Matteson raised $250M from notable investors for the innovative, $1.5B Legends Tower in Oklahoma City, set to be the tallest office tower in the country.

  • Broker branding: In the changing CRE landscape, top brokers like Knakal and Stacom are leaving big firms to start their own ventures.

  • Shattering expectations: Kara McShane's promotion at Wells Fargo (WFC) to the head of CRE broke barriers, leading to a diverse leadership shift.


  • Permit peaks: The number of multifamily permits rose 64.5% in the Northeast and 13.6% in the Midwest in January, but fell 32.5% in the South and 27.9% in the West.

  • Towering transformation: Chicago developer Fern Hill submits a $250M plan for a 44-story, 480-foot-tall apartment tower with 500 units in Old Town.

  • Rent review: The NYC Comptroller challenged a survey showing rent-controlled apartment vacancies rising due to repair costs, conflicting with landlord trade groups.

  • Pricey paradise: Tishman Speyer (TSIBU) acquired land for a 2k-unit Jersey City project, which includes a 58-story tower with 1k rental units.

  • Strategic pivot: Johnson Development secured a 1.5k-acre plot from the George Foundation, complying with IRS charitable distribution rules amid rising property values.

🏭 Industrial

  • Construction cost chaos: Industrial construction costs surged due to rising prices for steel, carpentry, concrete, and roofing.

  • Industrial resilience: Denver’s industrial market saw a slowdown in leasing activity post-pandemic, but investors just scooped up a $75M fully leased warehouse hub.

  • Logistics boom: Bridge Industrial secured a $150M mezzanine loan from Mesa West Capital and Morgan Stanley (MS) for a 2.5MSF logistics project in Tacoma.


  • Shrinking spaces: Big retail names struggle with traditional store formats as Macy's (M) closes 30% of unproductive locations, anticipating improved profitability.

  • Retail royalty: Realty Income (O) acquired American Realty Capital Trust's shopping center portfolio for $1.99B in cash.

  • Golden gam: Razny Jewelers' family buys a Chicago building for $16.4M from Nuveen, which booked a $2.5M loss from its 2014 purchase.

  • Retail resilience: Lake Worth Marketplace, a 200KSF strip mall in Lake Worth, TX, is 93% occupied, with popular retailers like Kohl’s (KSS).


  • Shifting dynamics: LinkedIn (MSFT) reduces its office space, pivoting to hybrid work amid job cuts.

  • Foreclosure drama: After defaulting on a $350M loan, pre-foreclosure was filed against Shorenstein's 1407 Broadway, where occupancy fell to 82% last June.

  • Bittersweet surrender: Walton Street Capital and Greenlaw Partners lost a 350KSF office tower in Orange, NJ, defaulting on a $64M debt.

  • A bull in an empty office: Investor optimism in Chicago's struggling office market is scarce, with plummeting sales volume and property values—yet Quintin Primo III is still bullish.

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Should Apartment Developers Take Cue from Austin's Job Surge?

Despite Austin leading in job growth projections for 2024, the alignment between employment rates and multifamily development presents a complex scenario.

Trends vs. Reality: Commercial real estate often reacts unpredictably to economic indicators. A RealPage analysis highlights that while 26 of the top 50 U.S. apartment markets are expected to exceed the national job growth average, this doesn't automatically signal a boom for multifamily developments. Notably, Austin, Las Vegas, and Houston top these projections, but the implications for apartment development are not straightforward.

The Pitfalls of Overenthusiasm: Despite optimistic job growth rates, cities like Austin have experienced pitfalls due to overbuilding and the subsequent fall in home prices and apartment rents. This situation exemplifies the "strategic inertia" within the CRE sector, where the momentum of investment and development fails to adjust swiftly to changing economic conditions.

Unique Dilemma: Austin's economy, bolstered by a tech job influx, has recently faced challenges, including a surplus of luxury apartments and unoccupied office spaces. This conundrum highlights the critical balance between job growth and real estate development, questioning the direct correlation between the two.


Strategic inertia: The industry may not adjust quickly enough to changing circumstances, which can impact real estate decisions. Developers and investors often rush to capitalize on perceived opportunities, leading to oversupply and market imbalances. The example of Austin's glut of lux apartments despite projected job growth highlights this ongoing issue.


Lease-up properties have seen an improvement in demand. A total of 6.2k lease-up units were absorbed in the past 12 months, up 39% YoY. The total number of units in lease-up properties went up by 86%, leading to a huge reduction in average absorption per property per month.

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