KBRA Releases Research – CRE CLO Distress and Loan Modification Rates Soar

KBRA releases research on commercial real estate (CRE) collateralized loan obligation (CLO) distress and loan modification rates. A review of CRE CLO loans originated prior to 2023 shows clear deterioration, with the distressed loan rate up nearly 4x from the end of 2022, to 5.4%. Meanwhile, the rate of loan modifications is up over 100% for the same period, to 16.7%. The distress rate, which is composed of loans that are either delinquent or specially serviced, was at a relatively low 1.4% at year-end (YE) 2022, while the percentage of loan modifications was 7.9% at that time. Multifamily, which represents about 70% of the aggregate outstanding loan balance, performed better, with a distress rate of 4.3% and modification rate of 12.7%. At the other end of the spectrum, office, which has the second-highest concentration at about 13.3% of the population, had a distress rate of 12.3% and a modification rate of 35.4%.

The worsening CRE CLO loan performance has been influenced by higher interest rates and challenged business plans, especially among multifamily and office properties that make up over 80% of the outstanding loans. The multifamily sector has been experiencing slowing or negative rent growth and higher operating and insurance costs, while the office sector continues to experience secular demand shifts, which has contributed to weak leasing activity. This has led to a number of deals in recent months not meeting their interest coverage and overcollateralization note protection tests as loans became delinquent.

In this report, KBRA assesses the performance of these loans. We look at all KBRA-rated and non-KBRA rated CRE CLOs, with a focus on the 2,760 loans originated in 2022 and prior, totaling $78 billion of unpaid principal balance as of December 2023.

Key Highlights

• Multifamily makes up 69.9% by principal balance (68.8% by loan count), with office at a distant second at 13.3% (11.4%).
• The overall distress rate is 5.4% by balance (5.1% by loan count). Multifamily has a distress rate of 4.3% by both balance and loan count, while office was at 12.3% and 12.7%, respectively.
• The overall modification rate is 16.7% and 13.7% by balance and loan count. Multifamily had a modification rate of 12.7% and 11.7% by balance and loan, respectively, while office was at 35.4% and 27.4%.
• Not surprisingly, through general adverse selection, the worst-performing cohort of outstanding loans are those originated 2020 and prior, with a distress rate of 11.9% and modification rate of 51.1%. However, the 2019 and 2020 outstanding CRE CLO transactions, which include many of these older-vintage loans, have paid down by 48.9%, which has increased the subordination levels for all the loans remaining in these deals.

Despite the above, ratings have exhibited stability, partly due to pay-downs on older-vintage transactions, subordination levels that take into account the additional risk associated with the non-stabilized nature of the CRE CLO collateral, and structural features of the transactions. However, should the trends not improve and continue to deteriorate, we would expect to see negative rating drift in the sector, particularly on the subordinate part of the capital structure.

Click here to view the report.

Related Publications

• CMBS NRA Determination up 130% in 2023
• CMBS Trend Watch: January 2024
• CMBS Loan Performance Trends: January 2024
• 2023 CMBS Loan Maturities: Better by Count
• 5- and 10-Year Deal Credit Metrics
• CRE CLO Refinance: Challenges Ahead for 2021-22 Vintage Loans
• CMBS Loan Performance Trends: January 2024

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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