What’s Going on With CLOs and the Commercial Real Estate Market?
Investing in commercial real estate requires you to make long-term plans that depend on factors which, at the time you make your plans, are virtually unknowable. Case in point, all of those people who invested in shared office space in 2019 had no idea that, in a year’s time, remote work would be the new normal, to the point that office space would become as much a fixture of residential real estate as commercial real estate. Business decisions also tend to be based on the best-case scenario, racking up debts like there is no tomorrow, and then selling them or restructuring them when things don’t go according to plan. The real estate market is notoriously volatile, so a change in the way people invest in real estate and borrow money for that purpose could be a sign of an impending financial crisis, or it could be much ado about nothing. For help seeing the big picture before you decide to buy or sell a commercial real estate property or invest in a commercial real estate project, contact a Bronx real estate attorney.
The Role of Collateralized Loan Obligations in Commercial Real Estate
Collateralized loan obligations (CLOs) are one of many ways of funding commercial real estate projects. A CLO is a loan with a short term of repayment, usually about three years, and a floating interest rate. The borrowers are usually medium-sized to large businesses, and the properties that secure the loans as collateral are usually commercial real estate properties that are undergoing renovation. Banks consider CLOs a risky financial product, because borrowers borrow them with the intention of reselling them with the loan matures, and this can be difficult, given the short terms of repayment. As of 2024, approximately $80 billion of commercial real estate CLOs are currently outstanding. This represents less than one percent of the total commercial real estate market in the United States, which is currently valued at $20 trillion. Despite this, a recently emerging trend in CLOs has caused economists to worry.
Are Recent Trends Involving CLOs a Canary in a Coal Mine?
In January 2023, 1.4 percent of CLOs were categorized as in distress. By January 2024, 8.6 percent of CLOs were in distress, which represents more than a fourfold increase. Compared to the entire commercial real estate market, this represents a drop in the bucket, but if these CLOs go into default, it could signal part of a larger trend involving defaults on real estate loans. CLOs were prevalent right before the real estate market crisis of 2008, but then they virtually disappeared from the real estate market landscape. Right before the real estate crash, an increasing number of CLOs went into default. Banks issued very few CLOs between 2009 and 2012.
Schedule a Confidential Consultation With a Bronx Real Estate Attorney
A real estate lawyer can help you make wise decisions about commercial real estate. Contact Cavallo & Cavallo in the Bronx, New York to set up a consultation.
Source:
globest.com/2024/03/20/the-cre-clo-problem-is-even-worse-than-it-seemed/?slreturn=20240228163340
