The CRED iQ CRE CLO distress rate added 60 basis points in December – reaching a new high of 13.8%.  Underpinning the distress rate, December’s delinquency rate for collateralized loan obligations came in largely flat at 11.8%; while the special servicing rate saw a 180-basis point increase, reaching 9%.  

CRED iQ’s analysis revealed that that 61.9% of CRE CLOs loans are operating below a 1.00 DSCR (NCF), up from 59.2% last month. Net Cash Flow (NCF) is a key variable in calculating a loan’s DSCR which determines the strength and creditworthiness of a given loan.

Among metro areas, Indianapolis-Carmel continues to lead the U.S. with a 70.6% distress rate. However, that figure trims 270 bps from the November print of CRE CLO loans in some form of distress.

The CRED iQ distress rate includes any loans reported 30 days delinquent or worse, past their maturity, specially serviced or a combination of these.

The distressed loan rate among commercial real estate (CRE) collateralized loan obligations (CLO) originated prior to 2023 rose nearly 400% year-over-year from the end of 2022, Kroll Bond Rating Agency (KBRA) reported. The distress rate ended 2023 at 5.4%, compared to 1.4% at year-end 2022.

Meanwhile, KBRA reported the rate of loan modifications is up more than 100% for the same period, to 16.7%. The loan modification rate was 7.9% as 2022 ended.

Multifamily, representing 69.9% of the aggregate outstanding loan balance, performed better than average, with a distress rate of 4.3% and modification rate of 12.7%. At the other end of the spectrum, office, with the second-highest concentration at about 13.3% of the loan balance, had a distress rate of 12.3% and a modification rate of 35.4% at the end of 2023.

“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,” KBRA reported.

Multifamily has experienced slowing or negative rent growth and higher operating and insurance costs, while the office sector continues to face secular demand shifts, contributing 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,” according to KBRA.