CLOs for commercial real estate on track for record year

Commercial real estate collateralized loan obligations (CLOs) are experiencing a significant resurgence, with $26 billion issued in the first half of 2026. This surge suggests that investors are becoming increasingly bullish on the sector's outlook following a period of high interest rates and market volatility. The trend is particularly important for the private credit market, as these securities provide critical funding for transitional assets like construction and renovation projects.

According to data from KBRA, the $26 billion in CLO issuance during the first half of 2026 represents a 51 percent increase compared to the same period in 2025. If this momentum continues, the market is projected to exceed the previous record of $45.4 billion set in 2021. This recovery follows a sharp decline in activity during 2023 and 2024, when annual deal volume dropped below $9 billion after the Federal Reserve began raising interest rates before picking back up to $30.6 billion in 2025.

CLOs serve as a vital funding mechanism for mortgage REITs and debt funds, which package transitional commercial mortgages—often used for property renovations or lease-up phases—into securities for investors. Historically, these instruments fueled a wave of multifamily fix-and-flip investments across the Sunbelt. While the current market faces challenges such as a glut of new multifamily supply that has slowed leasing activity, the underlying housing demand remains a fundamental driver for investor confidence in these debt products.

The structure of CLOs offers lenders the flexibility to modify loans, potentially helping borrowers navigate temporary setbacks as buildings take longer to reach stabilized occupancy. However, some analysts warn that this flexibility could lead to "extend-and-pretend" strategies that mask the actual level of distress within private credit portfolios. A working paper from the Federal Reserve Bank of Philadelphia highlighted concerns regarding whether lenders can continue purchasing troubled loans out of CLO pools if defaults reach critical levels.