Private Credit vs. Banks: Who’s Really Powering CRE?
A New Era of CRE Financing Emerges
The commercial real estate (CRE) financing landscape is undergoing a pivotal shift. In the wake of 2023’s market upheavals, private credit lenders – including debt funds, mortgage REITs, and private equity credit arms – have stepped into the spotlight, challenging the dominance of traditional banks. Data from CBRE show that banks comprised only 18% of new CRE loan originations in Q3 2024, a sharp drop from 38% a year earlier, while alternative lenders’ share rose to 34% (credaily.com). This trend raises the question: who is really powering CRE deals today?
Not long ago, bank financing was the default for most CRE sponsors, with nonbank lending seen as a niche or “last resort” option. That paradigm is rapidly changing. Private credit has evolved from a minor back-alley operation into a trillion-dollar force in the CRE capital markets. By 2025, the private credit market (encompassing corporate and real estate loans by nonbank lenders) had grown to an estimated $1.7 trillion and is expected to double by the end of the decade (commercialobserver.com). In the U.S. alone, private credit volume surged from about $141 billion in 2013 to $853 billion in 2023 (commercialobserver.com). Major asset managers like Apollo, Ares, and Blackstone have raised vast pools of institutional capital to deploy into real estate debt, at the very time banks have been pulling back (commercialobserver.com). BlackRock now projects the global private credit market (corporate and real estate) could reach $3.5 trillion by 2030 (commercialobserver.com). In short, private credit is no longer viewed as a lender of last resort – in many cases it has become the first stop for CRE borrowers (commercialobserver.com).
Why the sudden ascendancy? Industry experts point to a confluence of cyclical and structural factors post-2023. The rapid rise in interest rates, a string of regional bank failures, and tougher bank regulations created a “perfect storm” that boosted demand for nonbank capital. As one debt fund executive noted, private credit today is experiencing a “golden age”, with borrowers seeking out its speed and flexibility while banks retreat amid market stress (commercialobserver.com). At the same time, institutional investors hungry for yield have poured money into private debt strategies, attracted by the higher returns on offer. MSCI data shows that global private-credit funds outperformed many other asset classes in 2024, posting a 6.9% annual return (outpacing private equity’s 5.6%), as elevated rates passed through to lender yields (msci.com). This strong performance has validated private credit as a mainstream investment: according to PERE’s annual ranking, the 50 largest real estate debt managers raised an aggregate $267 billion over the past five years (perenews.com). In fact, real estate debt funds have nearly doubled their assets over the last decade (from ~$65 billion to ~$125 billion), and are currently raising ~$50 billion more to deploy (greenstreet.com). All signs point to a permanent expansion of private credit’s role in CRE finance.
Private Credit vs. Traditional Banks: Key Differences in CRE Lending
While both banks and private credit lenders provide vital financing to the CRE industry, there are important differences in how they operate. Understanding these differences is crucial for investors, sponsors, and limited partners when evaluating financing options. Below we compare private credit lenders and banks across several dimensions – pricing, leverage, risk tolerance, flexibility, and capital availability:
Pricing (Cost of Capital): Banks generally have a lower cost of funds (thanks to deposits), so bank loans have traditionally carried lower interest rates. However, recent market turmoil has widened credit spreads for all lenders. Private credit loans tend to be more expensive for borrowers – often floating rate with substantial spreads – reflecting the higher risk and lack of regulatory subsidy. For example, CRE debt funds today typically originate short-term loans at spreads of ~300–550 basis points over base rates, significantly wider than typical bank loan spreads (greenstreet.com). These higher coupons compensate private lenders for taking on deals banks won’t do. In the current environment, even banks are charging more, but private credit still commands a pricing premium. Borrowers must weigh this higher cost against the benefits of certainty and creativity that private lenders offer.
Leverage and Proceeds: Traditional banks have become much more conservative on loan-to-value (LTV) ratios, especially post-2023. It’s not uncommon for banks to cap leverage around ~50–60% LTV (or even lower for riskier assets like office) given stricter underwriting standards and regulatory capital rules. Private credit lenders, by contrast, often accommodate higher leverage or fill gaps in the capital stack that banks leave open. Debt funds will frequently offer stretch senior loans or pair senior loans with mezzanine financing or preferred equity to achieve total leverage of 70–80%+ LTV – albeit at a higher blended cost of capital. They are also more willing to underwrite transitional assets and use pro forma income, whereas banks prefer in-place cash flow. This higher risk tolerance (discussed more below) means private lenders can advance more proceeds relative to a property’s value or projected income. For sponsors, that can reduce the equity needed up front, though it comes with a pricier debt stack and stricter terms to mitigate risk.
Risk Tolerance and Underwriting: Banks today are constrained by regulators and shareholders to limit risk exposure. They face strict capital charges for certain CRE loans – for instance, High Volatility Commercial Real Estate (HVCRE) loans (such as construction loans without sufficient pre-leasing/equity) carry a 150% risk weight for banks, versus 100% for stabilized loans (afire.org). This makes banks think twice about construction and heavy value-add projects. Nonbank private lenders face no such capital rules and thus often specialize in higher-risk, higher-yield deals that banks avoid. They will provide bridge loans, renovation financing, “rescue capital” for distressed assets, and other forms of subordinate debt with an appetite for complexity. Their investor base (pension funds, endowments, insurance accounts, etc.) explicitly seeks higher returns and is comfortable with the real estate collateral risk (commercialobserver.com). Banks, on the other hand, are pruning exposure to anything perceived as high-risk – for example, many large banks in 2023-2024 actively reduced office loan exposure and even sold off parts of their CRE loan portfolios (trepp.com). In short, private credit will go where many banks fear to tread. However, private lenders mitigate risk through tighter covenants, interest reserves, and higher spreads, and they often have deep real estate asset management expertise to work through troubled loans (skills banks traditionally lack in-house) (afire.org). This difference in risk appetite has created a complementary relationship in many cases: private debt funds take on the riskier positions, while banks may occupy the safer senior layers or simply step aside.
Flexibility & Speed: One of the biggest advantages touted by private credit lenders is flexibility in deal structuring. Unlike banks – which have relatively standardized loan products, formal credit committees, and heavy regulatory paperwork – private lenders can customize loans to fit a borrower’s business plan. Need a quick closing in three weeks? An interest reserve to cover carry costs during lease-up? A mezzanine piece or an earn-out structure based on future performance? Private debt funds thrive on bespoke, creative structures. They negotiate case-by-case, often providing tailored terms (and they can often execute faster, with more limited due diligence periods). Borrowers in 2023’s volatile market increasingly valued this flexibility: many turned to private credit for “speed, flexibility and bespoke deal structuring,” especially after banks pulled back following the spring 2023 bank failures (commercialobserver.com). Banks are often slower-moving (subject to deposit outflows and internal risk reviews), whereas a debt fund or mortgage REIT can deploy capital quickly if it likes a deal. That said, private lenders’ flexibility has limits – they still require robust business plans and typically underwrite conservatively even if the structure is innovative. But relative to banks’ one-size-fits-most approach, the nimbleness of private credit is a major differentiator.
Availability of Capital: Perhaps the most critical difference in the current climate is simply who has money to lend. Many regional and mid-sized banks have been on the sidelines in CRE lending since 2023 – in fact, overall bank CRE loan growth essentially flatlined through mid-2024 (fsinvestments.com). Higher funding costs, balance sheet pressures, and regulatory scrutiny led banks to tighten credit or pause lending in certain sectors. By Q4 2024, banks’ share of new loan originations had plummeted, as noted earlier (credaily.com). Private credit has stepped into the breach with ample “dry powder.” After years of fundraising success, debt funds reportedly have billions in uncalled capital ready to deploy. Green Street noted that debt fund assets have roughly doubled in a decade and managers are seeking to raise tens of billions more to capitalize on today’s opportunity (greenstreet.com). Even during the broader real estate capital slowdown, private debt fundraising remained robust – demonstrating investors’ confidence in the strategy (perenews.com). In practical terms, this means borrowers are far more likely now to find an open wallet with a debt fund, mortgage REIT, or private lender than with a cautious bank. Private lenders are actively marketing themselves as “open for business”, whereas many banks are selectively lending only to top clients or not at all. The availability of credit from nonbanks has been a lifeline for deals that otherwise might stall. (It’s worth noting that even alternative lenders have limits – by late 2024 some mortgage REITs and debt funds had fully deployed their funds or hit risk limits, meaning not every project can find financing easily (fsinvestments.com). But generally, the capacity of private credit to fill the gap has been a defining feature of the post-2023 market.)
In sum, private credit lenders often come at a higher price but offer more leverage, greater risk tolerance, and bespoke solutions, with funding that remains available when banks pull back. Banks still provide the lowest-cost capital for low-risk projects and maintain huge CRE loan books, but their relative share in new lending has diminished. The two groups are not so much wholly in conflict as they are rebalancing roles. In many instances they are partnering: for example, large banks have been extending credit lines and warehouse facilities to debt funds (effectively financing the financiers) rather than making loans directly (credaily.com)(reit.com). A Citigroup executive described the dynamic as “competition but also collaborating” – banks source deals and provide back-end leverage to private credit firms, which in turn originate loans that banks can’t or won’t hold on balance sheet (commercialobserver.com, commercialobserver.com). This symbiosis allows banks to earn a yield indirectly (with less regulatory capital cost) and lets private lenders increase their firepower. In the end, both types of lenders are powering CRE, but their roles have shifted: private credit has moved to the forefront for deal execution, while banks play more of a supporting or selective role.
What’s Driving the Shift? Key Factors Post-2023
Several major forces have driven the rise of private credit relative to banks in CRE finance, especially since 2023. These include regulatory changes, market shocks, and macroeconomic conditions that have structurally altered lender behavior. The most notable drivers are:
Basel III Endgame (Bank Capital Rules): Global bank regulators have been finalizing the so-called “Basel III endgame” regulations, slated to start phasing in by mid-2025. These rules will significantly increase the capital reserves that large banks must hold against various assets, especially riskier loans. According to CBRE and industry analysts, the Basel III endgame will make CRE lending more expensive for banks and “push them to reduce direct lending to CRE” (credaily.com). In effect, for every CRE loan on the books, a bank will need to hold more equity capital, dragging on returns. This is particularly acute for construction and development loans (HVCRE), which already carry high risk weights. Facing lower profitability and stricter oversight, many big banks are preemptively scaling back new CRE loans or offloading exposures. As an alternative, banks are channeling funds into nonbank lending vehicles – for example, providing warehouse lines, repo facilities, or note-on-note financing to private equity debt funds (credaily.com). This way, banks still participate in CRE finance (earning interest on those credit lines) but with a more favorable capital treatment than making the loans directly (afire.org). The result is a regulatory arbitrage: private credit funds originate the loans and bear the direct risk, while banks fund those lenders in the background. Basel III endgame is accelerating this trend. One private lender quipped that banks have “essentially created the same structure, just backwards” – instead of lending to the property owner, they lend to the debt fund who lends to the property (credaily.com). Regulators intend Basel III to strengthen banks, but a side effect is CRE credit migrating to less-regulated arenas. (Bank executives like JPMorgan’s Jamie Dimon have voiced concern that such rules could drive lending into the “shadows” and increase systemic risk (credaily.com). Nonetheless, the rules are moving forward, and Fitch Ratings concluded that higher capital requirements should bolster bank resiliency even if they pinch profits (credaily.com).
Regional Bank Distress and Credit Tightening: Early 2023 saw the sudden failures of several regional banks (including Silicon Valley Bank, Signature Bank, and First Republic), which were among the largest bank failures in U.S. history (reit.com). This banking crisis had an immediate chilling effect on CRE lending. Banks large and small grew more cautious as they faced deposit outflows and scrutiny of their loan books. The Federal Reserve’s April 2023 Senior Loan Officer Survey reported a sharp tightening of lending standards for CRE and weaker loan demand – in other words, banks became far more selective and pulled back credit availability (reit.com). This retrenchment was especially pronounced among regional and community banks, which historically account for a hefty share of commercial mortgage lending. Banking regulators explicitly flagged concerns about high CRE concentrations at these banks (reit.com) (many had heavy exposure to office buildings and other troubled asset classes). In response, numerous banks started curtailing new loans, renewing only the safest credits, or even attempting to sell loans to reduce exposure (trepp.com). The numbers tell the story: bank CRE loan growth in 2023 was a meager 3.2%, down from 10.9% the year prior – the slowest growth since 2012, according to Federal Reserve data compiled by Trepp (trepp.com). In fact, by late 2023, some banks were effectively out of the CRE lending market beyond servicing existing clients. Borrowers felt this acutely when trying to refinance maturing loans – many found their longtime relationship banks unwilling to extend or asking for significant paydowns. This created an opening for private lenders to swoop in with bridge financing or gap loans. The 2023 bank turmoil, as one alternative lender described, “spooked lenders and depositors alike” and made private credit not just enticing but often necessary for borrowers in need (commercialobserver.com). Even into 2024, the aftershocks lingered: bank lending remained tight, and some banks continued shedding CRE loans to bolster liquidity. Nonbanks gaining share was a direct outcome of this credit tightening by traditional lenders.
Higher Interest Rates and Inflation: The surge in interest rates since 2022 – a result of the Federal Reserve’s fastest hiking cycle in 40 years – has had profound effects on CRE finance. The Fed’s policy rate climbed from near-zero to over 5% in barely a year, sending borrowing costs to their highest in over a decade. Higher interest rates impact CRE in two key ways: (1) they raise debt service costs, making deals harder to pencil out, and (2) they put downward pressure on property values (as cap rates and yield requirements rise). In 2022–2023, the combination of these factors led to a freeze in transaction activity and mounting refinance challenges. Many loans that were made at 3-4% interest coupons suddenly faced refinancing at 6-8%+ rates – a shocking jump that threatened debt coverage. According to Trepp, mortgage lending volumes plunged in 2023 as “risk-free rates and the risk premiums that lenders required shot up” (trepp.com). Lenders across the board became more risk-averse under these conditions. Banks in particular tightened loan-to-value requirements and increased debt coverage ratio thresholds to account for the higher rates. The availability of credit diminished (what some have called a “debt availability” crisis) because few lenders wanted to extend new loans on assets that might be depreciating in value due to cap rate expansion (reit.com). Capital markets were effectively constricted by the high-rate environment. Paradoxically, however, the rise in rates also attracted more investor capital into private credit strategies, as discussed earlier, because the yields on CRE debt became very attractive relative to other investments. Private lenders with dry powder were able to charge significantly higher coupons (often in the high single-digits or low teens including fees) and still find takers, both on the borrowing side (out of necessity) and the investing side (for the yield). Thus, while higher rates hurt overall lending volume, they benefited private credit funds that were positioned to lend – those funds could now lock in much higher returns on new loans. Many alternative lenders have described the current environment as one of the best ever for CRE lending spreads (afire.org, afire.org), provided one has the capital to deploy. Sponsors, meanwhile, have had to adjust to a world of more expensive debt. More equity is often required to make deals work, or creative solutions like seller financing and earn-outs are used to bridge valuation gaps. These conditions favor well-capitalized private debt providers, whereas banks (which tend to compete on lowest cost) found themselves less competitive. In short, the high-rate era shifted the balance toward those who can operate in a high-yield environment, which is exactly the space private credit occupies.
Capital Market Constraints (CMBS & CLO Slowdown): Another driver pushing borrowers toward private credit has been the dysfunction in public capital markets, such as commercial mortgage-backed securities (CMBS) and other securitization channels. In the boom years, a borrower might get a permanent loan via CMBS or a debt fund might securitize its bridge loans into a CRE CLO (collateralized loan obligation). But by late 2022 and into 2023, CMBS issuance plummeted – it fell nearly 44% in 2023, dropping to volumes on par with the post-GFC period (trepp.com). Rising interest rates, credit spread volatility, and investor skittishness (especially about office loans) made securitized lending far less reliable. The CMBS market’s retreat meant fewer outlets for long-term fixed-rate financing, again putting more onus on balance-sheet lenders. Life insurance companies, another key source of CRE loans, also pulled back somewhat due to allocation limits and higher yields on corporate bonds (their alternative). Overall, the capital markets constraints created a financing gap. Private credit funds and mortgage REITs stepped in here as well – some launched “rescue capital” programs targeting loans that couldn’t refinance via CMBS. Others simply held loans on balance sheet that in a looser market they might have securitized. The lack of takeout financing has kept many debt funds in deals for longer durations, but also allowed them to command better terms. It’s worth noting that by 2024, there were signs of the CMBS market recovering (industry observers like Nareit’s analysts pointed out CMBS volumes improved in 2024, benefiting lenders with conduit businesses) (reit.com). Even so, the secular trend is that nonbank lenders have filled the void left by shrinking capital market liquidity. When public markets wobble, private capital providers often become the only game in town for borrowers needing execution certainty. This has reinforced the importance of having relationships with debt funds, REITs, and other private lenders for anyone seeking to finance deals in a turbulent market.
These drivers collectively explain why private credit has vaulted ahead in CRE lending since 2023. Tighter bank regulation, internal bank distress, higher base rates, and constrained securitization channels all discourage traditional banks from aggressively lending – but they create a prime opportunity for alternative lenders willing and able to step up. As Affinius Capital researchers observed, it’s a “confluence of cyclical and structural tailwinds” yielding one of the best nonbank lending environments in decades (afire.org). Nonbank lenders bridge the gap between debt and equity, offer innovative structuring, and are backed by institutional money eager for yield (afire.org). Meanwhile, banks are incentivized to partner with these lenders to maintain some presence in CRE finance without stretching their balance sheets (afire.org). This grand rearrangement is not just a short-term blip; many see it as a durable shift that will persist even if interest rates ease. As PERE’s 2023 debt fund report noted, the “receding of bank commercial real estate lending coupled with the growing institutionalization of real estate debt” means this market likely has “plenty of runway ahead.” (perenews.com)
Implications for Deal Structuring, Underwriting, and Strategy
The rise of private credit and the relative pullback of banks carry significant implications for how CRE deals are structured and underwritten, as well as for investors’ long-term capital markets strategy. Both sponsors (borrowers) and capital providers need to adjust their approaches in this new paradigm. Below are key considerations and strategies moving forward:
1. Re-thinking Deal Structuring: In today’s environment, CRE deal structures must accommodate a more complex capital stack. Sponsors can no longer rely on a single low-cost senior loan from a bank at 75% LTV – those days are gone (at least for now). Instead, layered financing is common: for example, a moderate leverage senior loan (maybe from a bank or insurance company up to 50-60% LTV) combined with a mezzanine loan or preferred equity from a private credit fund to boost total leverage. Intercreditor arrangements and clear delineation of rights are crucial in such structures. Borrowers should be prepared for detailed negotiations with mezzanine lenders on cash flow control, cure rights, and exit scenarios. Alternatively, some debt funds offer “one-stop” stretch loans that mimic a senior+mezz structure internally. Sponsors need to evaluate the blended cost of capital and weigh it against project returns. In all cases, flexibility comes at a price – to get higher leverage or bespoke terms, a borrower will pay a higher interest rate or give up more equity upside. It’s important to model different structures (e.g., taking a 60% LTV bank loan vs. an 80% LTV package via debt fund) to see which maximizes risk-adjusted returns. We also see creative deal terms becoming more prevalent: accrual interest (PIK interest), sliding scale pricing based on performance, and earn-outs are tools private lenders use to make deals work. Sponsors and their advisers should be fluent in these structures. Overall, the ability to “mix and match” capital sources is now a key skill in deal-making. The partnerships between banks and private lenders can also benefit borrowers – for instance, a bank might provide a revolver or construction letter of credit while a debt fund provides the bulk of the term loan. Being open to these hybrid solutions can get more deals across the finish line.
2. Underwriting and Due Diligence Adjustments: Both lenders and borrowers must approach underwriting with a more conservative lens and higher buffers given the current climate. For sponsors, underwriting a new acquisition now means assuming higher interest costs (and ensuring viability under those costs). Debt service coverage ratios (DSCR) need to be healthy under forward interest rate curves, not just today’s rate. It’s prudent to build in interest rate caps or hedges for floating-rate debt – and indeed, many private lenders require borrowers to purchase rate caps (the good news is cap costs have recently come down with the market’s outlook for peak rates) (reit.com). Lenders, for their part, are doing deeper due diligence on property cash flows and sponsor wherewithal. Private credit lenders often underwrite as equity investors would, scrutinizing business plans in detail since they may end up owning the asset in a downside scenario. We see tougher appraisal and valuation analyses to account for potential market declines (e.g., using higher exit cap rates, shorter lease assumptions for offices, etc.). Underwriting now frequently includes contingency plans: what if an asset doesn’t stabilize on schedule? What if refinancing isn’t available at loan maturity? Debt funds are pricing in these risks with structure (reserves, escrows, shorter extension options). From an investor’s perspective (LP or allocator to real estate), underwriting the capital structure is as important as underwriting the real estate. One must ask: Is this deal’s business plan realistic under today’s financing conditions? If a deal relies on refinancing into a much lower rate two years from now, that’s a red flag. Stress-testing various scenarios (interest rate staying high, value dropping further, etc.) is essential. In summary, more stringent underwriting standards are a positive long-term outcome of this shift – both private lenders and banks that remain active are demanding stronger fundamentals, which should improve future deal performance. Sponsors should be ready for exhaustive questioning and documentation when securing financing, whether from a bank or a debt fund. Transparency and having backup plans (additional equity available, alternative exits) will go a long way in convincing lenders and closing deals.
3. Long-Term Capital Markets Strategy: For institutional investors and fund managers, the evolving financing landscape should prompt strategic recalibration. Real estate investors may want to diversify their funding sources and not rely solely on banks as in the past. Cultivating relationships with alternative lenders is now crucial – many sponsors are, for the first time, establishing lines of communication with debt fund managers or mortgage REITs they hadn’t worked with before. In some cases, club deals or co-lending arrangements are wise: bringing a bank and a private lender together can provide stability (the bank at lower leverage) and flexibility (the debt fund taking the higher risk tranche). From the perspective of limited partners (LPs) and CRE equity investors, the rise of private credit also presents opportunities to allocate capital into these credit strategies. Many institutional investors are increasing their target allocations to private real estate debt, drawn by its income profile and downside protection relative to equity. In 2024, private real estate debt accounted for roughly 24% of all real estate fundraising – a record high share (perenews.com, perenews.com). This suggests that in the long term, most large real estate investment platforms will have a debt capability alongside equity. We may see more real estate operators launching debt funds or partnerships (for example, equity firms teaming up with credit specialists) to ensure they have access to financing and to capitalize on the lending opportunity.
At the macro level, one strategic consideration is how sustainable the private credit boom is. While current conditions favor nonbanks, one should plan for various regulatory or market shifts. It is possible regulators will increase oversight on large private credit lenders if their market share continues to grow (similar to how the shadow banking growth in the mortgage market has caught regulators’ eyes). Also, when interest rates eventually normalize (or if bank regulations loosen in the future), banks could regain some ground. Contingency planning is prudent: borrowers should lock in longer-term financing when possible (for stabilized assets, an insurance or agency loan might still beat continually rolling short-term private loans). Having multiple exit options for any debt is key – for instance, can this bridge loan be taken out by a CMBS loan or a sale if needed? On the flip side, debt fund managers need to consider their long-term strategy: some may opt to securitize loans (via CRE CLOs) to recycle capital if public markets improve, while others might keep loans on book to maturity. From a capital markets strategy standpoint, participants should stay nimble and be ready to pivot. The ability to navigate between bank debt, life company debt, agency loans, debt funds, and CMBS as market windows open or close will be a competitive advantage.
Crucially, risk management must remain at the forefront. The current environment rewards those who diligently manage credit risk and structure. We have seen in past cycles that aggressive lending (wherever it comes from) can lead to future distress. Many observers note that while private credit is flourishing, it has not yet been truly tested through a full real estate downturn. Thus, both borrowers and lenders should be mindful of portfolio concentrations, refinancing cliffs around 2025-2026, and the potential need for loan workouts. Building in adequate cushions and covenants now will make the next downturn easier to handle. For example, requiring borrowers to put up additional equity if values fall (margin call mechanisms) or having strong recourse guarantees on certain transitional loans can mitigate risk – tactics more common with private lenders than banks historically.
In the long run, the shift toward private credit and nonbank financing in CRE appears structural. Even if banks eventually return in a bigger way, they are unlikely to fully reverse the market share that private lenders have gained. Real estate sponsors should therefore integrate private credit into their capital strategy permanently. This might include regularly canvassing debt funds when seeking financing, or even investing in debt funds as an LP to indirectly support their own financing pipelines. For institutions, developing in-house credit expertise or partnering with experienced debt managers will be important, so they can evaluate and participate in debt opportunities knowledgeably. Adaptability and openness to new financing models will be the hallmark of successful CRE investors in this new era.
Conclusion: Who’s Really Powering CRE?
In conclusion, the CRE financing landscape post-2023 is being powered by a new balance between banks and private credit. Traditional banks, once the unquestioned heavyweights of real estate lending, have retrenched in the face of regulatory pressures, market dislocations, and internal risk limits. Stepping into the breach are private credit lenders armed with capital, creativity, and a higher risk appetite. They are not only providing the financing that banks won’t – often at higher leverage and faster speeds – but are also forging a collaborative ecosystem with banks (through credit line partnerships and loan purchases) that is reshaping how deals get done. Today’s debt funds and alternative lenders are funding everything from core stabilized assets to the most challenging value-add projects, competing directly with banks on prime deals while also covering niche financing needs. Banks, for their part, remain a critical piece of the puzzle – especially for low-risk loans and as behind-the-scenes facilitators – but they are no longer the default **“powering” force for CRE growth that they once were.
So, who is really powering CRE? The evidence suggests that private credit has become the driving force in new CRE financing activity, with banks playing a more selective and supporting role. As one industry veteran at CBRE observed, the influx of private debt capital has created “robust competition” at all levels and fundamentally changed the borrower’s calculus (commercialobserver.com). This shift carries both opportunities and responsibilities. Borrowers benefit from having more options and tailored solutions, but must navigate a more complex lending market. Lenders enjoy wider spreads and strong demand, but must uphold discipline to avoid pitfalls. Overall, the rebalanced system – part of a broader secular trend since the Global Financial Crisis – could lead to a more resilient CRE finance market, one less concentrated in any single sector and more diversified across capital sources.
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Sources: Commercial real estate market data and concepts referenced from Nareit reit.com reit.com, CBRE Research cbre.com cbre.com, Green Street Advisors greenstreet.com, Investopedia investopedia.com investopedia.com, and other industry experts. These sources provide insight into how cap rates are used in practice and how they respond to economic conditions, supporting the discussion of cap rate calculation, interpretation, and trends over time.
Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. All investing and lending involves risk, and readers should perform their own due diligence or consult with professional advisors before making decisions. The views expressed here are based on market trends and sources as of the date of writing, and future conditions may change