Aron Youngerwood
Lucrum Realty
Nearly 40% of loans now on watchlists as real estate owners grapple with significant risks. According to CRED iQ's latest research (as of April 30, 2024), 38.6% of CRE CLO loans are flagged on servicers' watchlists. When combined with a distress rate of 8.6% for delinquent or specially serviced loans, a staggering 46.3% of these loans face some level of trouble.
The uptick in watchlist percentages signals historic levels of distress, hinting at potential future increases in special servicing and delinquency rates.
Many loans originated during the low cap rate, high valuation period of 2021 now face maturity issues due to rising interest rates. Floating DSR Triggers, particularly pending maturities, are the leading causes of distress among CRE CLO loans. With approx. $75 billion in outstanding loans, the majority are structured with floating rates and 3-year terms, with extension options available.
At Lucrum, our debt advisory team have successfully represented borrowers in modifying over $1 billion of commercial real estate loans, including for office, hotels, multifamily, student housing, senior living, medical centers and retail properties.
A case in point is Desert Gardens, a multifamily property in Glendale, AZ, recently added to the watchlist due to decreased occupancy. Originally backed by a $40 million loan, the property's below-break-even DSCR of 0.21 and rising interest rates pose significant challenges.
The borrower seeks to extend the loan past its June 2024 maturity, utilizing two one-year extension options. However, the current interest rate has surged to 8.82% from the original 3.55%.
These trends underscore the growing risks in the CRE CLO market, urging investors to monitor their portfolios closely and prepare for potential challenges ahead.
The Lucrum Team have successfully obtained a number of loan extensions, modified rate cap and escrow requirements, as well reductions of interest rate spreads and other debt relief for clients.
About Lucrum Realty
Lucrum Realty (www.lucrumrealty.com) represents borrowers by providing loan advisory, loan modification and restructuring services for borrowers. The Lucrum team includes former special servicers, lenders and restructuring experts.
Please email a member of our team if we can assist you or your clients.
Aron Youngerwood
Joseph Savitsky