Nearly $57B of multifamily loans are in potential trouble, according to new numbers from MSCI, spelling potential peril for opportunistic investors that pounced on a niche lending vehicle in the early part of the pandemic.

Distress is rising fast across multifamily loans, including on rolled-up mortgages that were packaged into collateralized loan obligations.

While that risky debt structure had been attractive to flippers who scrambled to invest in multifamily buildings when the onset of Covid-19 sparked mass migration and rock-bottom interest rates, much has changed, according to The Wall Street Journal.

Office distress remains about three times the value of distressed apartment loans, MSCI figures show. But the pool of multifamily loans that risks falling into distress down the road amounts to nearly $81B compared to about $67B for offices, according to MSCI.

Three years ago, the issuance of CLO debt to investors hit a high of $45.4B, as costs on such debt were low and valuations on properties were high. In 2021, the secured overnight financing rate, which is typically used to price floating-rate loans, was about 0.05%, the WSJ reported. Today, that rate is 5.33%.

Now, nearly half of those loans are failing to generate the net operating income that was underwritten into original loans, according to CRED iQ CEO Michael Haas.

With a lack of income and maturity deadlines hitting, the perfect storm has arrived to spike commercial real estate CLOs to their current distress rate of 10.8%, CRED iQ figures show. The National Association Of Insurance’s primer on CLOs shows that debt on CRE loans that are short-term on transitional properties usually have a duration of three to five years.

The issue may not be resolved soon, the WSJ reported. Debt issuers are on the hook for some of the fallout and may do everything in their power to keep loans afloat.

Benefit Street Partners and MF1 Capital have been among the biggest issuers of CRE CLO debt over the past few years. Arbor Realty Trust, a frequent target of short sellers, also lent billions in the space.

UPDATE, AUG. 12, 12 P.M. ET: MSCI provided new data on the dollar amount of multifamily and office loans that risk falling into distress. The story has been updated.