(Bloomberg) -- About 8.6% of commercial real estate loans bundled into collateralized loan obligation were distressed by one measure in January, a huge surge over the prior year’s proportion after borrowing costs surged, according to a report by analytics firm CRED iQ.

The distress rate is now 480% higher than in February last year, the data show. The borrowers typically used the debt to buy multifamily complexes, intending to renovate them and flip them at a profit, but many are now struggling with their floating-rate loans after interest rates increased. 

Multifamily debtors have also been struggling in some markets with rising insurance costs, falling values and increasing competition after investors piled into the market when rents spiked during the pandemic. Lenders, which include Arbor Realty Trust Inc., are hit if borrowers eventually default because they provided the equity portion of the CLOs, so are the first to suffer losses if the loans aren’t repaid.

“We are in a period of peak stress and expect the next two quarters to be challenging,” Arbor Chairman Ivan Kaufman told analysts on a call last week. The firm has “longstanding relationships with many quality sponsors that we’ve been working with to step in and take over assets that are underperforming and assume our debt and recap these transactions.”

The CRE CLO distress rate stood at 8.6% in January, the CRED iQ report says, compared with 1.5% in February of last year. The data provider’s definition of distress includes any loans that are 30 days or more delinquent as well as any loan that has been moved to a special servicer. Others define distress as loans which are 60 days or more past due.

There are about $80 billion of CRE CLO loans outstanding, according to the report.

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