Bundled commercial real estate loans climb to sales record
Sales of securities backed by riskier commercial real estate loans have soared to record highs, underscoring investor demand for higher yielding bonds and expectations of a rebound in commercial real estate.
Commercial real estate loan liabilities are created by private real estate investors. In these transactions, lenders sell debt and equity to provide short-term loans to borrowers who are renovating commercial real estate, especially apartment buildings. Funds from interest payments and principal from the pool of bridging loans go to the bondholders, while any remaining cash goes to the shareholders.
Bridging loans are typically given to changing properties such as vacant or obsolete apartment buildings, and the financed renovations may not pay off as quickly as expected, causing repayment delays and defaults. As a result, CRE-CLOs offer relatively large payouts at a time when many investors continue to expect commercial property to continue to recover from the pandemic.
Companies like Benefit Street Partners and TPG Capital sold $ 24.5 billion to CRE-CLOs this year through July 31, according to Trepp. That’s already an annual record for data dating back to 2014, surpassing the previous high of $ 19 billion in 2019.
This year’s record sales are a reversal from 2020, when shutdowns related to the Covid-19 pandemic caused some borrowers to postpone renovations or skip interest payments, increasing default rates. New commercial mortgage-backed securities issuance fell at around $ 65 billion, its lowest level since 2017.