Should You Be Worried About the Recent Increase in Commercial Real Estate CLOs?
So much about the real estate market is unpredictable. No one who was building shared office space, roller skating rinks, and movie theaters in 2019 could have anticipated what the next year would bring. Whenever one family buys one house, they are taking a financial risk, not knowing how much the value of the property will increase, or how easy it will be to sell it when they are ready. If they buy it with an adjustable-rate mortgage, or with the hope of refinancing in the near future, then they could be in for even more unpleasant surprises. Of course, a family’s decision to buy a house to live in is not primarily about money. If they take out a mortgage loan at a high interest rate and it stays high, at least they still have a family home. With commercial real estate, the highs are higher, and the lows are lower. The return on investment is an end in itself, and the amounts of money invested are exponentially bigger. A recent trend is the commercial real estate (CRE) market is causing some investors to worry. If you are buying commercial real estate for the first time, you should do so with the guidance of a Washington, D.C. real estate lawyer.
What Are CLOs, and Why Do They Make People So Nervous?
Collateralized loan obligations (CLOs) are not new; they have just made a return to prominence after a prolonged absence. A CLO is a high dollar value loan secured by a CRE property that is undergoing renovation; most of them have floating interest rates and terms of repayment less than three years. The borrowers of CLOs are usually medium-sized to large businesses, and they borrow the loans with the goal of selling them before the loans reach maturity. Therefore, banks consider CLOs a risky financial product.
After the housing market crisis of 2008, banks hesitated to issue CLOs at all, and businesses were not interested in borrowing them, so they virtually disappeared from the finance market. They have made a comeback recently, though. As of 2024, the combined total outstanding balance on all the CLOs in the United States is $80 billion, which is only a tiny fraction of the $20 trillion CRE market. Some CRE investors are worried, though, because the percentage of CLOs that are in distress has increased sharply in the past year. The percentage of CLOs in distress more than quadrupled between January 2023 and January 2024, meaning that now 8.6 percent of CLOs are in distress. This could mean a sizable increase in CRE defaults in the near future.
Even if you are not planning on investing in CLOs, a rise in CLO defaults could affect the CRE market as a whole. You should work with a real estate lawyer to understand the risks when investing in commercial real estate.
Contact Tobin O’Connor Ewing About Commercial Real Estate
A Washington, D.C. real estate attorney can help you get into the potentially lucrative world of commercial real estate. Contact Tobin, O’Connor, and Ewing in Washington, D.C. or call 202-362-5900.
Source:
globest.com/2024/03/20/the-cre-clo-problem-is-even-worse-than-it-seemed/?slreturn=20240228163340
