Sales of securities backed by riskier commercial real estate loans hit a record high, highlighting investor demand for higher yielding debt and expectations of a recovery in commercial real estate.
Loan bonds secured by commercial real estate are created by private real estate investors. In these deals, lenders sell debt and equity to provide short-term loans to borrowers who are renovating commercial properties, especially multi-family dwellings. Money from interest payments and principal from the bridge loan pool goes to bondholders, while any remaining cash goes to stockholders.
Bridge loans are typically made to changing properties, such as empty or run-down apartment buildings, and the renovations they finance may not pay off as quickly as expected, leading to late payments and defaults. . As a result, CRE CLOs are offering relatively high payouts at a time when many investors continue to expect commercial properties to rebound more after the pandemic.
Firms such as Benefit Street Partners and TPG Capital sold $ 24.5 billion of CRE CLO this year through July 31, according to Trepp. This is already an annual record for data going back to 2014, breaking the previous record of $ 19 billion in 2019.
This year’s record sales are a reversal from 2020, when closures linked to the Covid-19 pandemic caused some borrowers to delay renovations or skip interest payments, raising default rates. Issuance of new commercial mortgage-backed securities fell to its lowest total since 2017, around $ 65 billion.