Rising interest rates, maturing loans, and shrinking bank appetites have created a perfect storm in commercial real estate lending. Private CRE credit stands at the forefront of this transformation, offering solutions where traditional lenders falter. For savvy investors, it’s more than a short-term pivot—it’s a durable strategy for navigating a higher-for-longer rate environment and capturing enduring value.
Banks Reassess Role in CRE Lending
While banks still account for about half of all outstanding CRE loans, their retreat from the lending arena has been stark. A recent S&P report found banks’ CRE loan growth slowed to just 2% year-over-year by mid-2024, down from 13% in early 2023. Moreover, banks’ share of non-agency commercial and multifamily loans plummeted from 58% in late 2022 to 21% by March 2024.
The decline reflects not just economic caution but structural challenges—elevated deposit costs, asset-liability mismatches, and a tightening regulatory environment that makes certain loans less attractive for banks to hold. It also represents billions of dollars in lending capacity exiting the market.
While some banks are increasing their CRE exposure these days, increased regulations mean they’re more likely to do so via indirect means, so these assets don’t sit on their balance sheets. That explains the whopping 260% year-over-year surge in CMBS originations the Mortgage Bankers Association observed in Q3.
Regulators’ heightened scrutiny of banks’ CRE portfolios has exacerbated the slowdown. In its latest semiannual Supervision and Regulation Report, the Fed noted a sharp rise in CRE delinquencies, with rates topping 10% in the second quarter. In particular, non-owner-occupied CRE loans, where delinquencies nearly doubled over the year to 2.03% in Q2 2024. Among large banks, delinquency rates reached 4.94%, the highest in a decade.
The Fed study also found that only a third of large financial institutions met the Fed’s three requirements for soundness: capital planning and positions; liquidity risk management and positions; and governance and controls. The remaining 60%-plus still have significant progress to make.
It’s notable that this share has remained largely unchanged since last year’s study, raising questions about banks’ continued presence and role in CRE debt.
Delinquent commercial loans rose 25% over the year to $26 billion, with more likely in the pipeline. An S&P analysis of U.S. property records nationwide found that the average rate on loans originated in 2024 through August was 6.2%, compared to the rate on mortgages maturing of 4.3%. With declining NOIs stressing debt service and maturities set to peak at $1.26 trillion in 2027 as per CoreLogic, the 200-basis-point difference will mean some borrowers will have trouble re-upping their debt.
Compounding the pressure is the growing trend of “re-defaults” on previously modified loans. According to the Financial Times, re-defaults surged 90% year-over-year in 2024, reaching $5.5 billion—the highest level since 2014. It looks like traditional lenders will start thinking twice about the efficacy of extend-and-pretend strategies.
KKR analysts expect banks to reduce their CRE exposure by $100 billion annually over the next several years. This capital will shift to private lenders, CMBS markets, and debt funds, presenting a massive opportunity for non-bank participants to capture market share, particularly in the middle market.
Favorable Macro Environment
The Federal Reserve’s 525-basis-point rate hike between March 2022 and July 2023 marked one of the most aggressive tightening cycles in U.S. history. While Fed projects a decline in rates to approximately 3.4% by late 2025, they are unlikely to return to post-GFC lows. This “higher-for-longer” environment benefits private CRE credit, with average yields far outpacing traditional fixed-income benchmarks.
The resetting of asset values further enhances the appeal. CRE prices have declined by an average of 21% since their March 2022 peak, according to Green Street, providing lenders with a reduced basis for underwriting new loans. This lower starting point reduces risk in the capital stack and offers downside protection even in a volatile market.
Private credit continues to deliver a significant illiquidity premium, with returns exceeding public market comparables by 300-400 basis points annually since 2010, as per Preqin. For CRE debt specifically, Invesco found that floating-rate structures have produced all-in yields of 10%+ during recent rate hikes.
Investors concur, if a midyear sentiment survey from Preqin is any indication. A healthy 86% of respondents said that private debt “continues to meet or exceed expectations.” An even greater share, 92%, plan to maintain or increase their allocations over the year, underscoring the sector’s durability and appeal.
The current environment favors private lenders focused on senior loans, which occupy the top of the capital stack and offer enhanced security. Loans sized at conservative LTV ratios provide a cushion against further value declines, while floating-rate structures ensure that returns remain attractive even as rates fluctuate.
REITs’ Strategic Role
Private CRE credit has gained traction among sophisticated investors for its consistent returns and diversification benefits, but REITs offer a unique framework to amplify the benefits of the asset class. Beyond income and diversification, they deliver structural advantages that make them particularly appealing in today’s market.
Tax Efficiency. The Tax Cuts and Jobs Act of 2018 introduced a 20% deduction on qualified REIT dividends, allowing investors to maximize after-tax returns. With the act likely to be extended under the incoming Trump 2.0 administration, this provision offers significant advantages for income-focused strategies. Investors can effectively enhance their net yields compared to other private credit vehicles without compromising liquidity or stability.
Diversification and Risk Mitigation. Nontraded A REIT structure enables access to a diversified pool of loans across geographies, property types, and borrower profiles. This diversification not only reduces concentration risk but also aligns with the institutional-grade underwriting standards that define successful private credit funds. By pooling investments, REITs democratize access to opportunities that traditionally required significant capital commitments.
Reliable Income Streams. Unlike equity-focused CRE investments, which are subject to market volatility, private credit offers a more predictable income stream. When deployed through a REIT, these returns are further stabilized, as the vehicle’s structure absorbs market shocks and maintains payout consistency. This feature is particularly attractive for investors seeking reliable cash flow in a rising-rate environment.
The Path Ahead: A Durable Investment Thesis
Private lenders now manage $1.5 trillion of the $4.6 trillion in outstanding CRE loans, according to McKinsey’s most recent data. By 2029, private debt AUM is projected to reach $2.64 trillion, driven by a compound annual growth rate of 9.88%. Direct lending, the dominant segment, is expected to grow even faster, at 10.18% CAGR.
Already the fourth-largest fixed income asset class, CRE debt is growing rapidly. At the private fund issuer level, CRE debt fund AUM grew 380% since 2010 to about $200 billion in 2024, Comparatively, direct lending in general hit $600 billion, highlighting CRE debt’s popularity and potential
Private CRE credit is not merely a stopgap for the retreat of traditional lenders—it is an established and growing asset class that offers sophisticated investors compelling opportunities. In a landscape defined by constrained bank activity, maturing debt, and recalibrated asset valuations, private lenders have a unique opportunity to deliver strong, risk-adjusted returns. The combination of high yields, reduced basis risk, and favorable macroeconomic trends positions this sector as a cornerstone for resilient investment strategies.
The future of CRE lending is being redefined—are you ready to seize the opportunity?