A batch of 2021-era apartment loans is in trouble. Last week’s Federal Reserve rate increase might force owners and their lenders to sell underperforming properties and finally give bargain hunters a chance to buy real estate at low prices.
The distress rate in commercial real-estate collateralized loan obligations, a type of securitized real-estate lending, hit 28% in August, a jump from 19% in July, data from CRED IQ shows. These floating-rate loans are sometimes used to finance risky purchases such as a property that needs to be renovated before it can be fully leased. Cash flows might be volatile until a building has been refurbished and filled with new tenants.
Most of the recent rise in distress in the CRE CLO market is driven by loans that were issued in 2021, when property values were at all-time highs and borrowing costs were at all-time lows.
One portfolio, known as FS Rialto 2021-FL3, is particularly troubled. It started out with 26 floating-rate mortgages, but many of the performing loans have already been paid off, Morningstar analysis shows.
What is left are 18 mortgages against apartment buildings and one hotel where things haven’t gone to plan. According to CRED IQ, 53% of the outstanding loan balance is delinquent.
Last week’s interest-rate rise is a blow to these borrowers. Some of them are multifamily syndicators: gung-ho investors who loaded up on floating-rate debt during the pandemic and spent tens of millions of dollars on apartment buildings, often in Sunbelt cities. Their business plan was to renovate the units, raise the rents and flip the buildings for a profit.
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