About $67 billion in distressed loans amplify risks for commercial real estate CLOs
The commercial real estate sector is facing increased pressure, with more than $67 billion in housing showing signs of distress, reported Bloomberg.
This comes as borrowers find it challenging to repay loans secured during the peak of the pandemic, causing trouble for lenders like Arbor Realty Trust. The company, focused on floating rate loans bundled into commercial real estate CLOs (collateralized loan obligations), saw a significant uptick in missed payments towards the end of 2023.
Preliminary data from Banco Santander SA showed that about 16.5% of Arbor’s unpaid loans by value were past due in December, roughly 2.5 times higher than the average in the broader CRE CLO market.
Mary Beth Fisher, a senior fixed income strategist at Santander, has witnessed the upward trend in delinquency rates.
“Collateral performance in CRE CLOs deteriorated throughout 2023 with stress and delinquency rates rising sharply the final two months of the year,” Fisher told Bloomberg, forecasting this trend to persist into mid-2024.
Arbor Realty chief financial officer Paul Elenio commented: “As our investors are aware, we have been consistent and transparent in our messaging over the last several quarters and remain comfortable with our public statements and market guidance,” Elenio said. “We look forward to updating the public with our year-end earnings release.”
The tightening of monetary policy caught many apartment building financiers off guard, leading to concerns over potential defaults, especially for lenders like Arbor that offer bridge loans with floating interest rates.
Arbor Realty Trust has faced scrutiny from short sellers, including a report by Viceroy Research claiming the lender is weighed down by distressed loans. With about $7.3 billion of collateralized loan obligations outstanding last year and a significant portion of its capital tied up in CLOs, Arbor’s financial stability is under close watch as the market navigates through these turbulent times.
This financial squeeze has also led the New York Community Bancorp and Aozora Bank to allocate more funds to address troubled commercial property loans, reflecting the broader impact of rising interest rates on property values.
Fitch Ratings predicted the multifamily delinquency rate for commercial mortgage-backed securities could double to 1.3% this year.
Read next: Predicting the future for commercial real estate
MSCI Real Assets reports over $20 billion in potentially distressed apartment complexes purchased in the last three years, a figure that expands significantly when including properties not recently sold. Despite these challenges, Blackstone sees potential investment opportunities in multifamily assets, with COO Jonathan Gray expressing a long-term positive outlook despite short-term obstacles.
“It’s possible you could see us invest into the weakness in multifamily because we’ve got a long-term constructive view, even if there are some near-term headwinds,” Gray said on an earnings call last month.
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