Securities sales, backed by riskier commercial real estate loans, hit record highs, underscoring investor demand for high-yielding debt and expectations of a recovery in business activity.
Commercial real estate loan commitments are created by private real estate investors. In these transactions, lenders sell debts and shares to provide short-term loans to borrowers who renovate commercial properties, especially apartment buildings. The interest and principal payments from the bridging pool go to the bondholders, and any residual cash flows to the equity holders.
Bridging loans are usually made for ever-changing properties, such as vacant or outdated apartment buildings, and the renovations they finance may not pay off as quickly as expected, leading to delays in repayment and defaults. As a result, CRE CLOs are offering relatively high payouts at a time when many investors continue to expect further commercial real estate recovery after the pandemic.
Companies including Benefit Street Partners and TPG Capital sold $ 24.5 billion to CRE CLO this year through July 31, Trepp said. This is already an annual record for 2014 data, beating the previous peak of $ 19 billion in 2019.
Record sales this year are the opposite of 2020, when the Covid-19 pandemic-related blackouts forced some borrowers to delay repairs or skip interest payments, leading to an increase in default rates. Issuance of new commercial mortgage-backed securities fell to its lowest level since 2017 – about $ 65 billion.