Choppy Multifamily Market Driving Explosion In CLO Lending

With many of the multifamily bets made during the halcyon investment days of 2021 still waiting to pay off, borrowers and lenders have returned to the same financing mechanism that helped fuel that bull market: collateralized loan obligations, or CLOs.

Lenders issued $19.7B of CLOs — or managed securities of bundled, short-term transitional debt — in 2025, triple the total given out the year before, according to Moody’s data provided to Bisnow. More than two-thirds of those loans went to multifamily assets.

It was the busiest year in the CLO market since 2021, when lenders issued $43.5B. That record was driven by the strongest year for U.S. multifamily sales in history, when annual investment volumes doubled the previous record from 2019.

But many of the loans handed out in that period matured last year with apartment buildings underlying the debt that aren’t yet stable enough for permanent lenders to consider them. That means borrowers are in the market for more short-term debt. 

“A lot of people are just looking for neutral cash situations,” Disrupt Equity co-founder Feras Moussa said. “Most of the deals that are really looking for CLOs — they're not expected to get cash out. They're just trying to just stay in the deal long enough.”

The floating-rate bridge loans, which normally have three-to-five-year terms, are backed by the properties themselves, bundled into packages and sold to investors. But unlike CMBS bonds, CLOs are actively managed and are specifically geared toward properties that haven’t yet reached stabilization.

Part of the reason multifamily CLOs regained popularity last year was due to lenders seeking flexible loan structures amid economic uncertainty and a 10-year Treasury yield that had been hovering below 4.5% for almost a year, Commercial Real Estate Finance Council Managing Director for Industry Initiatives Rohit Narayanan said.

“There's no clarity whether [the 10-year] is going to come down or not,” he said. “But floating-rate is very clearly on a downward path, so it becomes the preferred mechanism for borrowers.”

The secured overnight financing rate, the benchmark for floating-rate loans, dropped from 4.5% in mid-September to just over 3.6% as of last week. The 10-year Treasury yield is up about 10 basis points over the same time span.

But Wall Street also warmed to CLOs for multifamily assets because it has more confidence that housing will start to yield a return on investment in the coming years. CLOs are forward-looking, underwritten based on expected rents rather than their track record, said Deryk Meherik, Moody’s associate managing director for commercial real estate finance.

That makes CLOs ideal for properties where owners are putting on the finishing touches, like adding appliances or painting interiors, and have yet to lease up, he said. They allow owners of newly built apartment buildings and of older buildings undergoing significant renovations to project what rents they will get once work is completed.

“All those loans fit well within the CRE CLO securitization, because there is that flexibility of bringing additional funding over time so that the board can pay for those business plans,” he said.

That dynamic is particularly important for the Sun Belt multifamily market, where rents have been dropping and only began to steady six months ago. Cities including Austin, Phoenix and Atlanta have seen years of softening apartment rents as new deliveries swamped markets, leading to underperforming floating-rate loans as owners struggled to fill apartment towers.

“Austin is a tough market. It was kind of the darling back in 2021, but it got really overbuilt to the point where you’re seeing new properties are giving four or five free months of rent,” Moussa said, adding that Austin’s multifamily rents have fallen by 30% as a result.

Developers are consequently building less housing nationally. Multifamily starts fell to their lowest levels since 2020 in October, according to the Census Bureau.

But vacancy has continued to creep up, and rents haven't started rising as expected. Rents are only expected to start gradually creeping upward again toward the end of this year.  

Lenders and borrowers alike are betting on prices accelerating during the next cycle of bridge lending, with properties reaching stabilization as new deliveries slow, Moussa said. 

“If you can get past the supply cliff — meaning, wait for all of the inventory to finish being built and get stabilized — well, there's a lot less properties being built in Austin the next three years than there was in past three years,” he said. 

Banks are also fueling the return of the CLO market. Their reaction to Basel III banking regulations has been to funnel more cash to private lenders than directly to property loans, said Tom Briney, president and CEO of lender Origin Credit Advisors.

“Those private lending groups, like Origin, are the ones who are actively using the CLO market,” he said. “As those regulations stay in place, you'll see more and more private lenders get into it and replace your traditional bank lenders.”