Quarterly U.S. CRE CLO Report: Murky Outlook Drives New Issue Volume Lower for Fourth Consecutive Quarter; Down More Than 90% From a Year Ago

• Q1 2023 commercial real estate collateralized loan obligation (CRE CLO) issuance fell again from the prior quarter and ended with only two transactions, totaling $1.1 billion, coming from Ready Cap and Asia Capital. The Q1 2023 issuance volume represents a decline of 92.7% from Q1 2022, which saw a record high issuance of more than $15.2 billion.
• DBRS Morningstar expects Q2 2023 to be another quarter with depressed issuance and only a handful of deals. The negative outlook is primarily related to how the capital markets are digesting and adjusting to the quick ascent of interest rates, while also considering the possibility for future rate increases. Adding insult to injury, episodic events like the failures of Silicon Valley Bank and Signature Bank, further credit tightening by banks, and rising office loan delinquencies foreshadow further turbulence in the coming quarters.
• The two CRE CLO transactions issued in Q1 2023 were static and comprised predominately multifamily loans, which represented 96.8% of the issuance—a much higher proportion than the 79.4% in the Q4 2022 issuance. The small amount of nonmultifamily loans included mixed-use and industrial loans.
• The delinquency rate increased to 2.86% from 2.60% at Q4 2022.
• The special servicing rate increased to 0.94% as of Q1 2023, up 35 basis points (bps) from December 2022 and up 55 bps from March 2022.
• As of the Q1 2023 reporting, the overall loan modification rate for CRE CLOs rose to 6.64%, an increase of 111 bps from 5.53% in December. This is the second consecutive quarter in which the loan modification rate increased by more than 100 bps.
• A rising trend in seasoned CRE CLO transactions that were originated with a variety of property types is the higher payoff rate for multifamily loans and the outsized concentration of office loans remaining in the trust. Despite this dilution of pool quality in seasoned deals, cash flows have continued to be strong enough to keep deals performing, and numerous structural features in CLOs continued to protect investors.