(Bloomberg) — The cracks in the commercial real estate market are widening from offices to apartment complexes, with more than $67 billion of the housing potentially distressed as borrowers struggle to repay loans extended during the height of the pandemic.
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That’s potentially bad news for lenders like Arbor Realty Trust Inc., which focuses on packaging its floating rate loans into commercial real estate CLOs, a financing strategy that boomed in popularity during the pandemic. The share of loans in Arbor’s CLOs that failed to make a scheduled payment more than doubled in the fourth quarter, according to preliminary data compiled by Banco Santander SA. About 16.5% of Arbor’s unpaid loans by value were past due in December, according to the data, about 2.5 times the level for the wider CRE CLO market.
“Collateral performance in CRE CLOs deteriorated throughout 2023 with stress and delinquency rates rising sharply the final two months of the year,” Mary Beth Fisher, a senior fixed income strategist at Santander, said in a note last month that discussed the overall market. The trend is likely to continue through the middle of 2024, she said.
Paul Elenio, chief financial officer at Arbor Realty, said the firm is currently in a quiet period as it readies to release year-end results later in February.
“As our investors are aware, we have been very consistent and transparent in our messaging over the last several quarters and remain comfortable with our public statements and market guidance,” Elenio said. “We look forward to updating the public with our year-end earnings release.”
Apartment building financers were caught out by the sharp tightening in monetary policy because they often extend so-called bridge loans, which have floating interest rates. Lenders such as Arbor are hit if the borrowers eventually default because they provide the equity portion of