Commercial Real Estate CLOs: Modifications, Delinquencies, and More
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Episode Transcript:
Today, we're diving into the latest developments in the world of Commercial Real Estate Collateralized Loan Obligations, or CLOs.
In the second quarter, we witnessed a substantial surge in modifications related to commercial real estate CLOs, reaching a staggering $4 billion. That's a massive 300% increase compared to the first quarter, which saw only $1 billion in CLO modifications. Quite the leap, isn't it?
Now, these modifications are not just a one-size-fits-all deal. They encompass various strategies aimed at buying some breathing room for property owners. We're talking about everything from increasing loan balances and altering interest rates to deferring payments, extending maturity dates, and granting borrowers access to existing reserves.
According to the latest report from Morningstar, lenders seem to be employing these modification strategies primarily to assist borrowers in getting their business plans back on track, especially if they're lagging behind schedule. It's a helping hand rather than a doomsday signal.
Digging a bit deeper into the specifics, modifications for CLOs linked to apartment properties saw substantial growth, with a 10.6% increase quarter-over-quarter and an unpaid loan balance of $5 billion. In particular, apartment owners in the Sun Belt regions are grappling with the challenges of increased supply, which is putting pressure on rent growth as loans near renewal.
Moving over to the office and retail sectors, modifications in these areas grew at a somewhat slower pace. However, it's worth noting that the office sector still holds a higher share of modifications compared to multifamily, with 14.5% of office-backed CLOs being modified in Quarter 2.
But here's the bottom line, – this surge in modifications doesn't necessarily scream immediate collapse. As Stephen Koehler, Vice President at DBRS Morningstar overseeing CRE CLOs, puts it, "It's kind of a 'Keep your eyes on this. Don't forget about this,' but not like a siren going off."
Now, in terms of delinquencies, there's a slight uptick. In June 2023, the overall delinquency rate for CRE CLOs reached 3.14%, marking a 15-basis-point increase from March but still up 2.25% from a year earlier.
On the brighter side, special servicing on CLOs took a dip, dropping by 27 basis points from Quarter 1. This marks the first quarterly decrease in more than a year, signaling a bit of a silver lining amidst these CLO adjustments.
This is Tyler Cauble, Signing off