Investors in private real estate credit have a lot to look forward to. Today, interest rates are double the trailing five-year average, while real estate spreads remain elevated. Additionally, lower property values provide an attractive entry basis for lenders. The combination of these factors suggests that investors in private real estate debt have the potential to earn income yields north of ~10% (see Figure 1).  

And the timing couldn’t be better—given increasingly volatile global markets, strong current income provides an attractive risk-adjusted option in investors’ portfolios, with the added benefit of hard asset collateral. 

Unlike corporate credit, asset values in real estate reset dramatically as a result of the elevated rate environment.

Since late 2022, interest rates have risen and property values have fallen in tandem (see Figure 2). Multifamily sector property values, for example, have declined by 20%. This creates opportunities to lend against commercial real estate (CRE) properties priced below their intrinsic value, essentially providing investors with more income on a derisked basis. It also creates a sizable funding gap as lower real estate values and higher interest rates have reduced debt capacity, providing opportunity for private lenders to originate debt and helping borrowers finance legacy capital structures.  

The confluence of elevated interest rates and low property values creates a unique environment for private real estate credit. While lenders have benefitted from elevated rates in recent years, today’s low values provide lenders with a cushion against potential loss. This is because lenders will be advancing less against current property values and, as a result, have a lower dollar basis or exposure against the underlying collateral property (see Figure 3).  

Property values have reset drastically in recent years, especially compared with corporate values. Loans originated at today’s property values are potentially protected from further value declines and should benefit from future value recoveries. Should property values decline further, loans originated at a discounted basis will benefit from the equity cushion ahead of their position. Conversely, as property values recover, today’s lenders would benefit from lower loan-to-value, providing some safeguard from potential loss.

Today’s attractive entry point also comes with a robust deal pipeline: A total of over $3 trillion in CRE loans are maturing over the next three years.  

The combination of elevated interest rates and significantly reduced liquidity in the CRE debt capital markets caused many borrowers to struggle to meet their debt service payments over the past two years, resulting in widespread extensions of loan maturities. There is now a significant amount of debt coming due that will need to be refinanced. The trajectory of CRE maturities has only continued to climb, with peak levels projected for 2027 (see Figure 4), suggesting a corresponding influx of lending opportunities.  

What’s more, approximately half of these loans were originated by banks (see Figure 5), who have since retreated in a meaningful way from CRE lending because of strict regulations and slim profit margins. Many borrowers will now have to tap private lenders instead. 

The cost of leverage is decreasing, benefiting private CRE lenders.  

While many banks are pulling back from direct lending in the CRE space, many of them still want to participate in the sector—and competition is high. These banks are increasingly willing to offer individual loan-on-loan or crossed facility financing at favorable terms, particularly on cost, to private lenders originating whole loans, particularly on cost (see Figure 6). This gives private market lenders more flexibility in structuring the capital stack and mitigates syndication risk stemming from the bank pullback.  

Notably, third-party leverage structures available to today’s lenders are different from the riskier offerings of past cycles and include borrower-friendly terms, including no-recourse provisions, no market-to-market provisions and match-term capabilities. 

Substantial liquidity in the housing and industrial sectors means there is ample capital available to support acquisitions and refinancings, while driving loan repayments.

While allocation of capital to the office sector has declined dramatically, high-conviction sectors such as multifamily and industrial have attracted capital consistently (see Figure 7).  

In the U.S., a severe housing shortage of over 4.5 million homes coupled with a sharp increase in mortgage rates in recent years is creating a growing class of permanent renters, continuing to bolster multifamily rent growth.¹ Furthermore, an uncertain economic outlook could dampen household wealth, continuing to push would-be buyers to rent instead. In logistics, demand also remains strong—businesses are holding ~30% higher levels of inventory than they were before the pandemic—and the supply picture is positive as we approach a sharp supply cliff in 2025.²

As a result of these trends, we have seen loan originations in the multifamily and logistics sectors increase to over 70% of all CRE loan originations, while office sector originations represent less than 6%. 

All this adds up to a clear case for increasing allocations to real estate credit, especially given its similar long-term return profile to core equity—with less downside risk.

Compared with real estate core equity, real estate debt has demonstrated consistent returns across cycles (see Figure 8). During recent real estate value corrections, lenders’ positions were largely insulated from loss (outside of the office sector). Ultimately, private real estate credit provides an opportunity to seek consistent risk-adjusted returns while benefitting from the security of an equity cushion at the top of the capital structure.  

Additionally, private real estate credit’s uncorrelated returns to core real estate equity—which we recently explored here—illustrates the diversification benefits the asset class can provide to portfolios, which are arguably even more valuable in times of volatility.  

However, generating those steady returns hinges on underwriting—and some managers are better equipped than others.  

To find the best return opportunities with minimal downside risks, we believe managers should use an equity lens to assess the underlying value. Managers that have comprehensive credit analysis capabilities and in-house operating platforms are best positioned to deliver all the benefits of commercial real estate credit to investors, in our view.  

In today’s volatile market environment, there is a clear case for increasing allocations to private real estate credit. Amid market uncertainty, investors stand to benefit from elevated interest rates, high real estate spreads and low property values, all of which position the real estate credit investor to receive consistent, strong income yields for less risk than in prior cycles. 

^Endnotes:

<sup>1. U.S. Chamber of Commerce, “The State of Housing in America,” March 2025.
2. Federal Reserve Bank of St. Louis, FRED Economic Data, January 2025.</sup>

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