- The CRE CLO distress rate hit an all-time high of 13.1% in Q3, a 277-bp increase from Q2.
- Office properties logged the highest distress rate at 18.5%, while multifamily held steady at 13.7%. Hotels saw the biggest increase, jumping 460 bps.
- Over 64% of CRE CLO loans are past their maturity dates, reflecting the impact of rising interest rates and falling debt service coverage ratios.
According to Commercial Observer, the distress rate for CRE collateralized loan obligations (CLOs) has reached an all-time high. The CRED iQ research team reported a 13.1% distress rate in Q3.
By The Numbers
This represents a 277-bp jump from the previous quarter, driven by rising interest rates and loan maturity challenges. The surge in distress levels underscores growing financial strain across commercial real estate sectors.
Office properties continue to lead in distress, with an 18.5% rate at the close of 3Q24, up from 17.1% the previous quarter, though still below the February peak of 21.3%.
Multifamily properties maintained a 13.7% distress rate, with fluctuations during the quarter, while the retail (11.1%) and hotel (8.5%) sectors experienced notable growth, particularly in hotel loans, which jumped 460 bps.
Rate, Maturity Impact
The rapid rise in interest rates has severely impacted floating-rate CRE CLO loans, leading to significant declines in debt service coverage ratios (DSCRs).
CRED iQ’s analysis revealed that 53.9% of distressed CRE CLO properties are reporting lower DSCRs than their original underwritten levels, with 62.3% operating below a DSCR of 1.00. These figures highlight the financial vulnerability of many loans in the sector.
The data also revealed that over 64% of CRE CLO loans are past their maturity dates, with 34.9% nonperforming. Many of these loans originated in 2021 when cap rates were low and valuations high, but the recent surge in interest rates has made it difficult for borrowers to meet maturity obligations.
In Summary
With distress rates at record highs, the CRE CLO market faces increasing pressure as floating-rate loans struggle to keep up with rising interest rates and maturing debt.
While the office sector remains the most distressed, retail and hotel properties are also experiencing growing challenges. This suggests a more difficult outlook for commercial real estate financing in the near future.
