A batch of 2021-era apartment loans is in trouble. Last week's Federal Reserve rate increase might force owners and their lenders to sell underperforming properties and finally give bargain hunters a chance to buy real estate at low prices.

The distress rate in commercial real-estate collateralized loan obligations, a type of securitized real-estate lending, hit 28% in August, a jump from 19% in July, data from CRED IQ shows. These floating-rate loans are sometimes used to finance risky purchases such as a property that needs to be renovated before it can be fully leased. Cash flows might be volatile until a building has been refurbished and filled with new tenants.

Most of the recent rise in distress in the CRE CLO market is driven by loans that were issued in 2021, when property values were at all-time highs and borrowing costs were at all-time lows.

One portfolio, known as FS Rialto 2021-FL3, is particularly troubled. It started out with 26 floating-rate mortgages, but many of the performing loans have already been paid off, Morningstar analysis shows.

What is left are 18 mortgages against apartment buildings and one hotel where things haven't gone to plan. According to CRED IQ, 53% of the outstanding loan balance is delinquent.

Last week's interest-rate rise is a blow to these borrowers. Some of them are multifamily syndicators: gung-ho investors who loaded up on floating-rate debt during the pandemic and spent tens of millions of dollars on apartment buildings, often in Sunbelt cities. Their business plan was to renovate the units, raise the rents and flip the buildings for a profit.

The timing of the Fed rate increase is tricky. CRE CLO loans are often structured with an initial three-year maturity, with two one-year extension options. This means many of the loans that were issued in 2021 are approaching their final maturity date.

Some of the assets look deeply distressed. Real-estate investor Ashcroft Capital borrowed against five apartment buildings in Georgia and Texas. Average rents during the first quarter were $1,423 per unit, far below the $1,953 projected by the lender, a recent Morningstar analysis shows. Rent growth expectations were too bullish, and income generated from the properties only covers 57% of the mortgage payment.

The Morgan is a 1984 apartment building in Austin that was bought by CAF Capital Partners in 2021. Occupancy at this property is just 65%.

The Austin apartment market is oversaturated, so competition among landlords to attract tenants is fierce. The income generated from rents and other fees at the Morgan only covers 15% of the mortgage payment, loan performance documents show. The borrower has paused the renovation work.

"It has reached a point where upgrading units in workforce apartments doesn't necessarily drive a monthly rent premium," says Alex Killick, a managing director at CWCapital Asset Management, a real-estate financial-services company.

Owners of troubled real estate who have a plan to raise operating income might get a loan modification, says Rich Hill, a senior managing director at Principal Asset Management. For owners who have been hanging on for lower interest rates but don't have a solid turnaround plan, "things are past the point of no return."

In the case of the properties in the FS Rialto 2021-FL3 loan pool, more than 90% of the mortgages have already been modified or received some kind of forbearance, according to Morningstar. Five of the properties now face foreclosure proceedings, based on CRED IQ analysis. Pickings have been slim for investors looking to buy distressed property at cheap prices in recent years. Lenders extended or modified loans to avoid taking a loss in a distressed sale. Only owners of troubled office buildings were willing to take a hit.

But recently, troubled assets have started to hit the market. In the second quarter, 4.7% of all multifamily apartment deals were distressed sales, up from 1.5% in the same period last year, data from MSCI shows.

The first interest-rate increase in three years, and hints of more to come, is likely to tip more apartment owners over the edge. Then there will be more opportunities to buy properties at attractive prices.