KBRA releases research on the challenges expected for the 2021-2022 vintage of commercial real estate collateralized loan obligations (CRE CLO).

Many of the loans in CRE CLO transactions issued in 2021 and 2022 closed when interest rates were much lower, the economic outlook was less uncertain, and capital markets were inherently more stable and liquid. Further, multifamily―the predominant property type in CRE CLOs―experienced robust rent growth, which has subsequently slowed. The environment has markedly changed since then, with loans from those vintages likely to face refinancing challenges. The 2021 and 2022 vintages represent a meaningful portion (81.3% by count, 81.6% by balance) of the outstanding CRE CLO universe (2,595 loans, $87.1 billion). Many of the loans in these vintages have not benefited from substantial rental growth as experienced by loans in prior vintages, and did not originate at lower leverage points that now characterize many 2023 vintage loans.

Key Takeaways

• KBRA’s analysis of 2021 and 2022 vintage CRE CLOs indicates that approximately three-quarters (72.9%) of outstanding loans that contributed to these transactions at origination would fail to meet 2023 stabilized CRE fixed rate lenders’ debt yield (DY) expectations, even if it were assumed that originally projected stabilized net cash flows (NCF) were achieved on every property. The analysis suggests these loans have elevated refinance risk, barring asset outperformance, cash/equity infusion from borrowers, loan modifications, or bridge-to-bridge refinance.
• In the low likelihood scenario, where lending conditions and interest rates revert to the 2021 environment in the near term, the refinance outlook would dramatically improve with 80.6% being able to meet stabilized DY hurdles.
• Conversely, if the current elevated interest rates persist and property fundamentals continue to weaken, whereby projected stabilized NCFs are not achieved, the refinance outlook would become even more dire.
• However, the securitization structures offer meaningful credit support from subordination and excess spread, and allow for and incentivize asset management flexibility to modify or buy out nonperforming loans, all of which should continue to support the performance of transactions.

Click here to view the report.

Related Publications

• CMBS Trend Watch: September 2023
• Building Vintage Driving Office Distress; Municipal Response Varies
• CMBS Loan Performance Trends: September 2023
• Metro-Level CRE Loan Distress: Location Still Matters

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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