Just two years ago, the commercial real estate collateralized loan obligation (CRE CLO) market was reeling, having shrunk dramatically from its $44.2 billion peak in 2021. According to Trepp, this contraction in 2023 was fueled by the heavy reliance on floating-rate multifamily and office properties, where both borrowers and lenders had banked on uninterrupted growth.
Those optimistic assumptions quickly unraveled. Trepp reports that over $17 billion in loans originated during that period now have debt service coverage ratios (DSCRs) below 1.00x—a sign of vulnerability to rising interest rates and dwindling liquidity.
But 2025 has ushered in a new dynamic. In the first half of the year, a fresh crop of $17 billion in CRE CLO issuance has emerged. The second-quarter deals boast a weighted average DSCR of 1.31x and a debt yield of 15.65%, paired with a coupon of 8.07%. Trepp notes that the spread between debt yield and coupon—a key proxy for lender risk-adjusted return—has been steadily widening. The difference is stark: this year’s 7.6% positive spread (15.65% debt yield versus 8.07% coupon) stands in sharp contrast to the first quarter of 2023, when lenders faced a negative carry, with a 4.68% debt yield against an 8.79% coupon. “This negative carry amplified refinancing and default risk, especially for floating-rate loans facing upward reset pressure,” Trepp wrote.
In response, underwriters have tightened their standards, introducing stabilized DSCR floors and steering away from structure-led deals. Borrowers, meanwhile, are turning to loan-on-loan financing and other capital-efficient strategies to maintain liquidity and investment returns in an environment of higher coupon rates and reduced leverage.
The composition of the CRE CLO market has also shifted, according to Trepp. Office property exposure has plummeted 97% since 2021, now representing just $148 million. Retail stands at $379.5 million. Multifamily assets have become the dominant class, making up approximately $12.1 billion—or 71%—of this year’s issuance, up from 62% in 2021. The rationale for using CLOs has evolved as well, with a new emphasis on short-duration loans that provide financial flexibility and long-term options.
There has also been a surge in lodging ($1.35 billion, driven by cyclical cash flow recovery) and industrial ($1.79 billion, buoyed by logistics tailwinds and sustained performance), both reaching their highest levels since 2021. Other categories—including self-storage, mixed-use, and specialized asset types—totaled $2.47 billion.
Trepp draws a clear distinction between the exuberance of 2021 and the current climate. While the earlier period was marked by optimism and loose credit, the market today is defined by “restraint, selectivity, and a recalibration of both risk and return.” CRE CLOs are now available only under stricter financing structures, higher coupon rates, and with far greater scrutiny.
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