Basel III, Private Credit, and the Future of CRE Debt Markets
In the coming year, a convergence of regulatory shifts and market forces is reshaping commercial real estate (CRE) debt financing. From new bank capital rules and a looming refinancing “maturity wall” to the rise of private credit and shifting cross-border capital flows, the landscape is in flux. Lenders and investors alike are bracing for impact – and seeking opportunity amid the turbulence. Below we break down the key trends and their implications.
Basel III Endgame: Tighter Bank Capital Rules Loom
Big banks are about to get even more conservative with their lending. U.S. regulators have finalized the so-called Basel III Endgame rules, effective July 1, 2025, which mark the final phase of global bank capital reforms following the 2008 crisis (pwc.com) (pwc.com). These rules force banks to hold significantly more capital against their loans and other assets, fundamentally altering how banks approach risk. In practice, large global systemically important banks (GSIBs) could see required capital levels jump by roughly 21%, while even mid-sized and regional banks might face about a 10% increase (pwc.com, pwc.com). The rules will be phased in over three years through mid-2028, giving banks some runway to adapt (pwc.com).
What does this mean on the ground? Banks – especially the biggest lenders – will likely tighten credit and re-price loans to account for higher capital costs. Regulators argue that heftier capital buffers will make banks more resilient in downturns and reduce bailout risk (brookings.edu, brookings.edu). But banks warn the timing is fraught: forcing them to hold more equity could curtail lending and dampen liquidity just as the economy faces other headwinds (pwc.com, pwc.com). Indeed, several Fed and FDIC officials dissented on the proposal, citing concerns it might stifle economic growth or bond market activity (pwc.com, pwc.com). Still, with the rules poised to take effect, banks large and small must recalibrate.
For commercial real estate, the upshot is tighter bank underwriting. Higher capital charges on CRE loans – especially construction and higher-risk loans – mean banks will be more selective and likely demand more conservative terms (lower loan-to-value ratios, higher interest spreads, etc.). Some regional banks that had been aggressive in CRE may retrench to preserve capital. As one banking consultant put it, Basel III Endgame represents a “sea change” for U.S. banks’ capital regimes, extending more granular and rigorous requirements to banks that previously enjoyed lighter touch (ey.comey.com). In short, bank credit for real estate could become scarcer and more expensive, pushing borrowers to seek funding elsewhere.
Private Credit Steps Into the Lending Void
Enter private credit. As traditional banks pull back, non-bank lenders – from private equity debt funds to insurance companies – are rushing in to fill the CRE financing gap. These private credit funds have spent the past few years amassing dry powder (i.e. committed but undeployed capital) and are now under pressure to put it to work. By mid-2025, an estimated $350 billion in real estate “dry powder” sat on the sidelines, a record high (credaily.com). Mega-firms like Blackstone, Apollo, and Brookfield alone account for a large share of this war chest (credaily.com). Many raised funds during the uncertain 2022–2023 period and held back as rates rose and property values fell, but they’re signaling readiness to pounce on deals in late 2025 (credaily.com).
Crucially, these alternative lenders are targeting returns that would have seemed heady just a few years ago. With benchmark rates up and banks constrained, private CRE loans now often carry yields in the high single-digits to mid-teens. For example, mezzanine debt (a subordinate loan behind a senior mortgage) often comes with interest rates between 10%–15% annually (adventuresincre.com) – a premium reflecting its greater risk but also the opportunities in today’s market. Even relatively senior private loans are far more lucrative than before: one investment firm noted that rising rates and wider credit spreads have lifted typical private credit returns to around 12%, and with some fund-level leverage, a 14–15% gross internal rate of return (IRR) is achievable (adamsstreetpartners.com, adamsstreetpartners.com). In other words, debt providers now see equity-like returns, and they’re stepping up to lend where banks won’t (adamsstreetpartners.com, adamsstreetpartners.com).
This surge of private credit is manifesting in multiple ways. Debt funds are originating whole loans, often on transitional properties or value-add projects that banks deem too risky. They’re also providing mezzanine loans and preferred equity to plug gaps in the capital stack – financing that sponsors use to top up what senior banks lend, albeit at a higher cost. In a recent industry survey, real estate leaders reported turning increasingly to non-bank sources: aside from regional banks (still the top choice), debt funds, insurance companies, and other non-bank institutions made up a growing share of planned financing (citrincooperman.com). Notably, more than 30% of investors said they intend to use preferred equity or mezzanine financing in the next year (citrincooperman.com), a sharp rise in these mid-stack solutions. This reflects a “new normal” of creative financing, as traditional cheap debt is harder to come by (citrincooperman.com). From the borrower’s perspective, these tools provide flexibility – sponsors can bridge funding shortfalls without diluting all their ownership – but at the cost of higher servicing payments and more complex agreements.
For institutional investors (the limited partners backing these private credit funds), the appeal is clear: a chance to capture high yields secured by real assets. Private credit has “shed its reputation as private equity’s boring sibling,” one fund manager quipped, noting that for the first time, private debt returns are approaching those of buyout equity – but with lenders enjoying stronger covenants and seniority in the capital structure (adamsstreetpartners.com, adamsstreetpartners.com). Indeed, as banks step back, private lenders are negotiating favorable terms, including lower leverage on properties and tighter covenants, which improve their protection even as they lend at higher rates (adamsstreetpartners.com, adamsstreetpartners.com). All of this suggests private credit will play a permanent, expanded role in CRE finance moving forward. However, this shift also means borrowers must manage a more complex capital market, often assembling deals with multiple layers of debt from disparate sources, each with their own return requirements and rights.
Facing the CRE Maturity Wall: Refinancing Crunch Ahead
Compounding the challenge is a mountain of commercial mortgages coming due in the next few years – a phenomenon widely dubbed the “maturity wall.” Between now and 2026, roughly $1.5–$1.8 trillion of U.S. commercial real estate debt will reach the end of its term (globest.com) (citrincooperman.com). In 2024 alone about $950 billion in CRE loans were scheduled to mature, and the annual volume is projected to swell to nearly $1 trillion in 2025, ultimately peaking in 2027 at about $1.26 trillion (spglobal.com). In short, an unprecedented wave of refinancing is about to crash ashore.
The timing couldn’t be worse. Many of these loans originated 5–10 years ago, when interest rates were near historic lows and property values at all-time highs. Fast forward to today: interest rates have more than doubled from their 2010s levels, and property valuations for certain sectors (like office buildings) have plummeted. This is creating a refinancing gap that is forcing painful choices. A loan made in 2018 at a 4% interest rate, for example, might reset to 8% in 2025. Unless the property’s income has grown substantially, the higher debt payments will crush the debt service coverage ratio (DSCR) – meaning the property’s cash flow may no longer cover the new loan payments. Bank regulators have openly flagged this refinance risk: in a rising rate environment, some borrowers simply “may be unable to service their debt at higher interest rates upon refinance” (occ.gov).
Moreover, property values in many markets have declined, eroding the collateral cushion. Commercial property prices are still down about 18% from their 2022 peak on average, according to one index, despite a modest rebound in 2024 (fool.com). The damage is even more severe in troubled segments – for instance, high-quality office buildings in major cities have seen values fall 30% or more from their highs (costargroup.com, costargroup.com), a reflection of higher vacancies and changed work patterns. Lower valuations mean that when owners seek a new loan, even lenders willing to lend 60% of value will end up offering a much smaller loan than the outstanding balance. Many borrowers are discovering that their current debt far exceeds what new lenders will finance, unless the owner injects additional equity or the original lender extends the loan and “kicks the can.”
Indeed, market participants anticipate a mix of defaults, extensions, and distress as this maturity wall comes due. In one industry survey covering an anticipated ~$1.8 trillion of CRE loans maturing by 2026, over half of professionals expected a rise in defaults/foreclosures, and a similar percentage predicted widespread loan extensions to delay the reckoning (citrincooperman.com, citrincooperman.com). Some borrowers will manage to negotiate extensions or modifications – essentially hoping for better conditions in a few years. Others won’t be so lucky: lenders and borrowers are already engaged in tough conversations about restructuring debt or handing over keys.
The implications for valuations and the broader market are significant. To refinance on new terms, many projects simply can’t carry as much debt as before – implying that property values must adjust downward unless owners add equity. This dynamic is especially evident in assets like older office towers or shopping centers facing higher cap rates (lower values) and weaker cash flows. Properties that can’t secure adequate refinancing may be sold at a discount or go into foreclosure, which in turn puts more downward pressure on comps and appraisals.
On the flip side, well-capitalized investors are eyeing this shakeout as a buying opportunity. Distressed debt funds and opportunistic equity buyers are raising capital to snap up assets or loans from distressed owners. Lenders, too, are preparing: banks are bolstering reserves and special workout teams, knowing a wave of maturities in underperforming loans could test their balance sheets. All told, the CRE maturity wall is poised to be the biggest stress test for real estate since the financial crisis, with the fate of many properties hanging on the outcome of refinancing negotiations in the next 12–24 months.
Cross-Border Capital at a Crossroads (Currency and Tariff Crosswinds)
Complicating the outlook further is the global nature of real estate capital. For decades, cross-border investors – from Asian insurers to Middle Eastern sovereign funds – have been important players in U.S. commercial real estate. Yet today, currency fluctuations and trade tensions are adding new wrinkles to these capital flows.
One striking fact: foreign buyers historically account for only about 12% of U.S. real estate investment activity, whereas in most other major markets they make up 30–60% of volume (prea.org). That share could shift as global conditions evolve. Right now, the strong U.S. dollar and high U.S. interest rates are a double-edged sword. On one hand, a strong dollar means that overseas investors must pay a currency premium to buy U.S. assets – effectively making American real estate more expensive for them in local currency terms (docs.prea.org). In addition, the wide interest rate gap between the U.S. and other regions makes hedging currency risk costly, often slicing an extra 1–3% off returns per year for foreign investors who hedge the dollar back to, say, euros or yen (preaquarterly-digital.com) (harrisonbrookusa.com). These factors have cooled some inbound investment. For example, institutions in Europe or Asia might hold off on U.S. acquisitions if they expect the dollar to eventually weaken or if hedging costs render a deal’s yield unattractive.
On the other hand, the strong dollar presents opportunities for U.S. investors outbound. American firms are finding that European real estate now looks relatively cheap: the euro and British pound have been undervalued relative to the dollar, allowing dollar-based investors to buy high-quality assets in Europe at a discount, with potential upside if those currencies appreciate later (docs.prea.org, docs.prea.org). This has spurred some U.S. allocators to diversify abroad, even as foreign buyers tread cautiously in the States. It’s a reminder that capital is fluid: if U.S. markets become too pricey or difficult, global investors can redeploy to regions offering better currency or cyclical advantages.
Meanwhile, tariff and trade dynamics are also impacting the real estate equation. In recent years, the U.S. has seen a resurgence of trade barriers – for instance, a 25% tariff on imported steel and aluminum (reimposed by the administration) is currently in effect, with additional duties on Chinese building materials and potential new tariffs on Canadian lumber and Mexican drywall (wilsonlewis.com, wilsonlewis.com). These trade taxes drive up construction and renovation costs. Industry analysts estimate that tariffs could push U.S. construction costs another 4–10% higher in 2025, on top of pandemic-era inflation that already made materials about 40% more expensive than in 2020 (wilsonlewis.com). For cross-border investors, this is a twofold issue: higher project costs can deter foreign developers from undertaking U.S. projects (or demand higher returns to compensate), and trade tensions introduce uncertainty around supply chains and economic relations. A Canadian or Chinese investor, for instance, must consider not just exchange rates but whether the next trade spat will increase the cost of their project’s steel or spur new regulations on foreign ownership.
That said, global capital is not monolithic. Some international investors have strategic or geopolitical motives that keep them engaged in U.S. real estate regardless of these headwinds. For example, Middle Eastern sovereign wealth funds, flush with cash from energy revenues, continue to view U.S. property as a long-term safe haven, and some operate in dollars or dollar-pegged currencies (reducing their currency risk). Similarly, Canadian pension funds – already deeply entrenched in U.S. real estate – might actually benefit from certain trade dynamics (e.g. owning U.S. timberland or factories if tariffs protect domestic production). And if the dollar were to decline in coming years, we could see a resurgence of foreign capital snapping up U.S. assets at what they perceive as a relative bargain.
In summary, cross-border capital flows are at a crossroads. Currency strength, interest rate differentials, and tariffs are influencing where global investors put their money. For now, the U.S. market must compete harder for foreign capital, and some development deals are pricier due to trade policies (wilsonlewis.com, wilsonlewis.com). But real estate remains a globally sought asset class, and large pools of capital will adjust and redeploy rather than exit entirely. Savvy investors will monitor these macro trends – and perhaps time their moves to ride the shifts (for example, increasing hedged investments in U.S. assets if the dollar softens or targeting sectors insulated from trade cost spikes).
Strategies for Sponsors and Investors in a Shifting Market
All these changes – regulatory, financial, and macroeconomic – call for strategic adaptation by real estate operators (sponsors) and their capital partners (LPs). The playbook that worked in the low-rate, high-liquidity 2010s won’t suffice in the more challenging landscape of the mid-2020s. So what are savvy players doing?
1. Rethinking the Capital Stack: Real estate sponsors are getting more creative (and conservative) in structuring deals. Gone are the days of maxing out cheap bank debt at 75% loan-to-value. Instead, many are using blended financing stacks – perhaps a senior loan at 50–60% LTV from a bank or insurance lender, then a layer of mezzanine debt or preferred equity on top to achieve, say, 70–80% leverage, with the remaining equity coming from the sponsor and LPs. This approach acknowledges the new reality: banks won’t shoulder as much of the financing, so other sources must fill in. The rise of mezzanine and pref equity is notable; industry data show a marked increase in sponsors raising these forms of capital, which provide cash to the deal without diluting ownership control (citrincooperman.com). For investors, these middle-layer positions offer an attractive risk/return middle ground – higher yields than senior loans but more protection than pure equity (citrincooperman.com). A decade ago, mezzanine debt might have been an afterthought; today it’s almost standard in large, complex deals.
2. Rigorously Stress-Testing Deals: Both sponsors and lenders are running deals through harsher underwriting scenarios. Can the property still cover debt payments if interest rates tick another 100 basis points up? What if exit cap rates are a full percentage point higher at sale? What if occupancy dips due to a recession? Deals that barely pencil out under rosy assumptions are being shelved. Debt service coverage ratios (DSCRs) are being watched like hawks, with many lenders demanding higher DSCR cushions knowing that cash flows could be squeezed on refinance. It’s a time for discipline – better to structure conservatively now than to overreach and struggle later. As one OCC bulletin advised banks, prudent underwriting means building in cushions (e.g. requiring stronger DSCR or lower LTV at origination) so that borrowers have a fighting chance to refinance under tougher conditions (occ.gov, occ.gov). Sponsors are heeding this too, often bringing more equity to deals or choosing not to fully lever in order to ensure sustainability.
3. Capital Reserves and Asset Management: On existing assets, owners are beefing up capital reserve planning. Anticipating that refinancing may require a cash infusion, savvy sponsors are reserving more of their operating cash flow and working with their investors to be ready for “rescue capital” if needed. Those with portfolios are triaging assets: which properties are at risk of breaching loan covenants or needing capital? Should they sell a weaker asset now to raise cash and reduce debt on another? Active asset management is key – improving occupancy, cutting expenses, and maximizing NOI to bolster property values ahead of loan maturities. In some cases, sponsors are proactively refinancing early (even if it means a prepayment cost) to lock in debt before rates rise further or before their metrics deteriorate. The name of the game is staying ahead of trouble rather than reacting after a default occurs.
4. Strategic Asset Selection: Investors and sponsors are also shifting what they buy and develop. In uncertain times, capital is gravitating toward sectors and markets with resilient demand. Multifamily apartments and industrial warehouses, for example, continue to enjoy relatively strong fundamentals – housing remains in shortage in many regions, and e-commerce and supply chain reconfiguration keep industrial space in demand. An industry survey noted that many in real estate are “most excited” about Sun Belt markets and asset classes like multifamily and industrial, which have solid tailwinds (citrincooperman.com). These sectors are not immune to higher rates or economic swings, but they benefit from structural support (demographics for apartments, logistics trends for warehouses). By contrast, office and certain retail are being approached with extreme caution or not at all – except at distressed pricing. Some opportunistic investors are looking at converting obsolete offices into housing or other uses, but those projects are complex and not a quick fix. Overall, portfolios are tilting toward what one might call “all-weather” real estate – assets that can better withstand a period of higher interest costs and tougher refinancing. This can also include niche segments like necessity retail (e.g. grocery-anchored centers), healthcare real estate, or self-storage, which have proved durable through cycles.
5. Partnership and Expertise: Finally, sponsors and LPs are leaning on strategic partnerships and expert advice more than before. Given the complexity of recapitalizing deals and sourcing non-traditional financing, many regional developers or smaller operators are teaming up with larger platforms or capital advisors. Aligning with experienced partners can bring in fresh equity or loan guarantors, as well as access to broader lender networks. Joint ventures – for instance, a local operator partnering with an institutional investor who brings additional equity – are a way to solve funding shortfalls and share risk. The common theme is collaboration: in a market where “capital is becoming more selective”, as one investment memo put it, having the right relationships and structuring know-how can make the difference in closing a deal (sterlingassetgroup.com). Real estate has always been a team sport, but the current environment rewards those who can assemble the right team of capital providers, advisors, and operating expertise to get deals done prudently.
Bottom Line: The commercial real estate debt market is undergoing a fundamental realignment. New bank regulations like Basel III are pulling banks back just as a flood of loan maturities hits, creating a financing crunch that private credit is eagerly – but selectively – stepping in to alleviate. Globally, currency and trade currents add more complexity, influencing where capital flows. For borrowers and sponsors, survival and success will depend on adaptability: adopting creative capital stacks, bolstering fundamentals, and partnering smartly to weather the storm. The coming years will test the mettle of industry players, but they will also open the door to those who innovate and stay disciplined. As the dust settles, the CRE financing landscape may look very different, with a more diverse set of lenders and investors sharing the stage once dominated by banks. Winners will be those who not only navigate the immediate challenges but also position themselves for the new opportunities that emerge in this transformed market.
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