KBRA released an updated commercial‑real‑estate (CRE) collateralized loan‑obligation (CLO) default and loss study covering 6,919 loans from 227 CLOs issued between July 1 2013 and March 31 2025, with performance tracked through the March 2026 trustee remittance report. The research highlights a sharp increase in loan distress—rising to a 22.9% cumulative distress rate—while realized principal losses remain confined to a small subset of loans. By comparing the new findings with KBRA’s inaugural 2021 study, the update illustrates how macro‑economic headwinds, especially inflation, rapid rate hikes, and shifting demand for office and multifamily space, have translated into higher modification activity even as actual loss experience stays limited.
KBRA Publishes Updated CRE CLO Default and Loss Data
The study expands on KBRA’s inaugural CRE CLO Loan Default and Loss Study released in July 2021. It examines a population of 6,919 loans representing more than $30 billion of new issuance in 2025 and ongoing activity in 2026. The combined default rate (payment defaults + maturity defaults) reached 10.4%—341 payment defaults and 378 maturity defaults. When loan modifications are added, the broader distress metric more than doubles to 22.9%, reflecting 863 modified loans.
Realized losses were limited: only 33 loans reported principal losses while still outstanding, spread across 19 deals with an average loss severity of 41.7%. KBRA notes that 86.5% of defaulted loans and 74.2% of modified loans have been resolved through repayment or repurchase, and none of the losses affected any issued notes beyond the most subordinate unrated class.
The data also reveal that 90% of the study population is no longer outstanding. Of this, 64.5% were paid off by borrowers or sponsors (including purchases at par) and 25.5% were repaid at deal redemption. This high resolution rate underscores that the majority of exposure has already been settled, even as the remaining active pool shows heightened stress.
Market Conditions Driving Higher Distress
The CRE CLO asset class entered its 15th year amid a backdrop of inflation, rapid interest‑rate hikes, compressed multifamily operating margins, and shifting office‑space demand. After a record issuance year in 2021—when CRE CLO volumes hit $45 billion—issuance fell sharply in 2023 and 2024 before rebounding to more than $30 billion in 2025, with momentum continuing into 2026.
The study population is weighted heavily toward loans originated from 2018 to 2022 (69.8%). Those vintages accounted for 87.9% of defaults and 88.1% of modifications, reflecting the pandemic’s impact, subsequent high inflation, and unprecedented rate increases that began in mid‑2022. Originations in 2022 experienced the worst outcomes, with an 18.1% default rate and a 44.2% distress rate; 2021 followed with 13.6% defaults and a 33.9% distress rate.
Property‑type performance varied. Office loans posted the highest default rate at 15.3%, followed by lodging (13.3%), retail (12.5%), multifamily (10.2%) and industrial (2.4%). When modifications are considered, lodging (34.4%) and multifamily (24.2%) showed the greatest distress, indicating that lenders are more frequently restructuring loans in those sectors.
Sponsor analysis revealed 38 CRE CLO sponsors after accounting for consolidations. Among the 22 issuers with five or more CLOs, the average default rate was 9.5% (range 0–29.4%) and the average distress rate was 22.2%, closely aligning with the overall population figures.
Implications for Financial Institutions
For banks, insurers, and other investors that hold or service CRE CLOs, the study underscores a widening gap between payment defaults and broader loan distress. While payment defaults remain modest at 4.9%, the inclusion of maturity defaults and modifications pushes the distress metric to nearly one‑quarter of the portfolio. This suggests that credit‑risk monitoring should extend beyond traditional delinquency thresholds to capture restructuring activity that may signal emerging weakness.
The limited realized losses—33 loans with an average loss severity of 41.7%—indicate that, to date, the most subordinate tranches have absorbed the bulk of credit pain. Senior noteholders have not experienced principal loss, which may reassure holders of higher‑rated securities but also highlights the concentration of risk in the lowest‑rated layers.
Given that 90% of the study population is no longer outstanding, most exposure has already been resolved. However, the concentration of defaults and modifications in recent vintages (92.9% of defaults and 96.2% of modifications occurring since March 2020) signals that newer issuances remain vulnerable to macroeconomic stressors. Institutions should therefore scrutinize upcoming CLO vintages, especially those with heavy exposure to office and lodging assets, when assessing pipeline risk.
Key Takeaways
- The cumulative CRE CLO loan distress rate (defaults + modifications) reached 22.9% for the study period, more than double the 7.8% distress rate reported in KBRA’s 2021 study.
- Realized principal losses were confined to 33 loans (average loss severity 41.7%) and did not affect any issued notes beyond the most subordinate unrated class.
- Loans originated in 2022 exhibited the highest stress, with an 18.1% default rate and a 44.2% distress rate, while office loans recorded the highest default rate by property type at 15.3%.
FinanceInsyte's Take
The KBRA update signals that CRE CLO investors are encountering higher levels of loan restructuring, even as actual loss experience remains limited. Executives should broaden credit‑risk dashboards to include modification activity and closely monitor newer vintages, especially those tied to office and lodging assets. Uncertainty remains around how continued rate hikes and evolving office demand will affect future CLO performance, making forward‑looking stress testing a prudent next step.
Source: Busuinesswire
