Is the Negativity Around CLOs Really Warranted?

Defining the future of real estate

Author

Franco Faraudo
March 20, 2024

Propmodo Daily

By Franco Faraudo · Mar. 20, 2024

Greetings!

There's been concern over rising delinquencies in Collateralized Loan Obligations (CLOs). Some articles suggest this bad debt could trigger a financial crisis similar to the CDO-driven crash of 2008. Today, we'll examine the differences between CLOs and CDOs to assess the validity of these fears.

Also featured in today's email: Hines is trying to create a signature scent for their offices. They believe nothing triggers memory like smell, yet offices usually lack a distinct aroma (besides the occasional reheated lunch mishap!). Can a custom scent enhance the work environment? We investigate in today's article.

Plus, this week Propmodo Technology is focusing on valuation and underwriting technology with our sponsor Valcre, an innovative appraisal platform for the commercial real estate industry. We’re exploring the potential of automated valuation models, how cutting-edge data and tech are helping identify and mitigate risk, and how the industry can prepare for the coming wave of commercial property revaluation.

Now, let's dig in!

Is the Negativity Around CLOs Really Warranted?

Recent headlines have hyped up an "obscure" investment called Collateralized Loan Obligations (CLOs), citing a spike in delinquencies as a sign of doom for commercial real estate. But a closer look reveals this is a temporary blip, not a sign of an impending crash.

First, CLOs aren't exactly obscure. With a US market value of $970 billion (as of September 2023), they've been a major source of commercial real estate loans, especially as banks have retreated.

Some articles wrongly compare CLOs to the infamous CDOs of the 2008 crisis. Yes, both bundle loans for investors, but that's where the similarity ends. CLOs typically use floating-rate loans from non-bank lenders and prioritize protecting investors. CDOs were built on fixed-rate loans packaged by investment banks.

The Great Recession wasn't triggered by how loans were packaged but by the poor quality of those loans themselves. Most CLOs sit at far safer loan-to-value ratios (50-65%) than the risky CDOs of 2008.

Yes, CLO delinquencies spiked recently, possibly up to 8.5%, but these calculations vary wildly (some say closer to 4.8%). Importantly, the trend is already reversing, mirroring the potential slowdown of Fed rate hikes.

Fearmongering aside, professional investors still favor CLOs - many CLO ETFs are at record highs. This wave of media doom-and-gloom about commercial real estate is just another round of sensationalism. Some folks crave a real estate crash, either to say, "I told you so," or to swoop in on bargains. But those who know the industry see through the hype and recognize history doesn't always repeat itself.

Workplace

What Does a Quality Office Workplace Smell Like?

To entice employees back to the office, real estate firm Hines focuses on perks that save employees time and money. Among these, their most unique initiative is a signature scent. Designed to be relaxing and uplifting, this custom fragrance aims to create a welcoming atmosphere in Hines' office spaces. The subtle aroma, strategically diffused through HVAC systems, has received positive feedback. While its success is hard to quantify, this approach signals a growing trend of sensory experiences in the workplace as companies prioritize employee wellness.

READ ONLINE (https://propmodo.com/what-does-a-quality-office-workplace-smell-like/)

Insider Insights

🏘️ Housing campaign: President Biden gave a speech in Nevada yesterday that outlined his plan to address the housing affordability crisis.

💨 Carb(on) free: A recent JLL report has shown the growing demand among corporate occupiers for more sustainable buildings.

Overheard

A Look at Rent Growth in Top Cities With Office-To-Residential Conversions

READ ONLINE (https://propmodo.com/a-look-at-rent-growth-in-top-cities-with-office-to-residential-conversions/)

Irvine Company's Strategy for Keeping Leasing High in a Down Market

READ ONLINE (https://propmodo.com/irvine-companys-strategy-for-keeping-leasing-high-in-a-down-market/)

A Guide to Office-to-Residential Conversion Incentives Across the U.S.

READ ONLINE (https://propmodo.com/a-guide-to-office-to-residential-conversion-incentives-across-the-u-s/)

Propmodo Technology: Valuation & Underwriting

The Future of Commercial Real Estate Valuation Could Be Shaped by Machines

READ ONLINE (https://propmodo.com/the-future-of-commercial-real-estate-valuation-could-be-shaped-by-machines/)

Cutting-Edge Data and Tech May Be Real Estate's Best Hedge Against Soaring Risk

READ ONLINE (https://propmodo.com/cutting-edge-data-and-tech-may-be-real-estates-best-hedge-against-soaring-risk/)

Bracing for Commercial Real Estate's Revaluation Surge

READ ONLINE (https://propmodo.com/bracing-for-commercial-real-estates-revaluation-surge/)

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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