CRE CLOs Face Mounting Stress as Loans Struggle with Rising Rates, Falling Property Values

Commercial real estate collateralized loan obligations (CRE CLOs) are facing unprecedented stress as underlying loans struggle with rising rates and falling property values.

Delinquency rates for loans in CRE CLOs have surged 4-fold in the last 7 months, with some now in the double digits.

Issuers are rushing to modify loans to struggling borrowers, while short sellers ramp up attacks on publicly traded issuers they say have little equity value left.

The pain stems from a shakeout in the broader $20 trillion commercial real estate market, impacting risky construction loans tied to properties being renovated or expanded.

With borrowers struggling to make payments, CLO managers are taking steps like buying out delinquent loans to avoid triggering mechanisms that would shut off payments to investors.