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Defaults of CLOs Backed by Apartment Buildings Are on the Rise

Published on May 12, 2023

The Wall Street Journal reports that defaults in collateralized loan obligations (CLOs) used to fund commercial real estate (CRE) purchases are on the rise. Nearly $88 billion in securitized commercial mortgages are at risk of default, with 42% of these backed by apartment buildings. Rental apartments accounted for the majority of CRE CLOs issued in 2021 and 2022, which due to shorter terms and floating rates, make property owners more susceptible to sudden shifts in the market. Although defaults remain low, they have been slowly increasing in the CRE market, with 1.4% of CRE CLOs delinquent as of April 30, up from 0.4% since last July. CRE investors are also facing increased pressure given that many hedges protecting the loans against high interest rates are set to expire.

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