Over the past year, my colleagues and I have observed and engaged in discussions about the evolution of C-PACE (Commercial Property Assessed Clean Energy) financing within the commercial real estate (CRE) market, particularly in relation to the capital stack. This conversation has been ongoing, reflecting C-PACE’s growing prominence and its role in addressing the financial needs of property developers and owners. As my colleague, Petros Cofounder Jim Stanislaus, eloquently stated:
“C-PACE has become the most economically sustainable capital in the stack. We truly consider it the vehicle through which we are financing the way forward. Petros was built with inherent differentiators designed to finance large transactions. We’ve put a lot of work into investor partnerships and our unique, proprietary structure… allows us to offer not only certainty of close to sponsors and borrowers in C-PACE markets nationwide, but it ALSO gives us the ability to fund increasingly larger future transactions.”
This sentiment remains as true today as when it was first expressed. However, the past year has presented significant challenges, and understanding how C-PACE has weathered those difficulties offers key insights into where we go from here.
The CRE Market: A Tumultuous Year
High interest rates, declining demand in certain sectors, and shifting work patterns created uncertainty across the industry. Last May, we witnessed the challenges of high-interest-rate environments and a lack of demand, particularly in the office sector. Central business district (CBD) office buildings experienced increasing vacancies due to the lingering impact of remote work preferences. At the same time, the market saw a growing emphasis on quality—properties with sustainable features attracted greater attention, achieved higher rents, and commanded stronger sales prices. This trend highlighted a shift toward future-forward investment strategies.
A major concern in this uncertain environment was the prevalence of “extend and pretend” strategies, where lenders and owners deferred dealing with the real market value of assets. We recognized the need for a market reset, where property values would more accurately reflect current demand and economic realities.
So, where do we stand today?
The Path to Stability: Where We Are Now
Challenges will continue to persist until the impending wall of maturities gets refinanced…or not. But the market is starting to show some signs of improvement and appears to be gradually getting more active; and although the road ahead will be slow, conditions are improving. C-PACE has not only retained its place as an attractive source of capital but has also solidified its role as a key component of the capital stack.
Historically, C-PACE was considered a niche financing tool, but it is now evolving into an expected layer in capital structuring, much like mezzanine financing, which emerged in the 1990s and is now a staple. Financial institutions that were once viewed as competitors are increasingly becoming partners, as banks address balance sheet concerns and look for ways to mitigate risk. While mezzanine financing and debt funds continue to play a role, they are often expensive options. C-PACE, by contrast, has become the most cost-effective capital available in many cases, making it a preferred choice for developers seeking efficiency in their capital structures.
As my colleague Jim predicted, Petros and other leading C-PACE providers are leveraging proprietary structures to fund increasingly larger transactions. This growth signals a major shift in how C-PACE is perceived and utilized within CRE financing.
The Institutionalization of C-PACE
C-PACE is now experiencing a bifurcation. It remains highly effective in its traditional sweet spot—the middle-market sector for projects under $100 million—but we are also witnessing its expansion into larger institutional deals exceeding $100 million. This shift marks a significant evolution, as institutional investors and larger-scale developers begin to embrace C-PACE as a standard component of financing large transactions.
This institutional acceptance is crucial for the future of C-PACE. Historically, alternative financing mechanisms have faced skepticism before becoming mainstream. Mezzanine financing, for instance, took time to gain traction but is now indispensable. C-PACE is following a similar trajectory, moving from an innovative financing tool to an essential pillar of commercial real estate finance.
What Lies Ahead for C-PACE and the CRE Market?
Looking forward, the market is poised for a slow but steady recovery. The reset we anticipated last year is taking place, with property valuations becoming more aligned with real demand. This period of adjustment will likely lead to an increase in transaction volume, as developers and investors who paused deals due to unfavorable conditions revisit their plans.
One of the most encouraging trends is the downward trajectory of interest rates. As rates decline, more deals will come off the sidelines, contributing to price discovery and increasing certainty in property values. A more active transaction environment will, in turn, bolster market confidence and further solidify C-PACE’s role in financing structures.
Interestingly, the lending landscape is also shifting. While some traditional banks are re-entering the market, the vast majority of senior lending activity—95% by some estimates—is now taking place outside of traditional banking channels. Non-bank lenders have stepped in to fill the gap, and their increased participation has further strengthened C-PACE’s role. Banks themselves are now actively seeking out C-PACE financing as part of their lending solutions, fostering a collaborative rather than competitive dynamic between C-PACE providers and traditional lenders.
As this trend continues, we anticipate C-PACE becoming even more deeply integrated into commercial real estate finance. No longer just an alternative or supplementary tool, C-PACE is evolving into a fundamental component of capital structuring across a wide range of property types and transaction sizes.
The Road Ahead: C-PACE at the Forefront of CRE Financing
The evolution of C-PACE over the past decade has been remarkable, but its most transformative phase is happening now. As we climb out of a challenging market environment, C-PACE is proving to be a stabilizing force, providing affordable, long-term financing at a time when the industry needs it most.
With increasing acceptance among institutional investors, greater collaboration with banks, and growing utilization in larger transactions, C-PACE is no longer merely an emerging financing tool—it is an integral part of the modern capital stack.
For developers, investors, and lenders alike, the message is clear: C-PACE is not just here to stay; it is redefining the way commercial real estate is financed. As we move forward, its role will only continue to expand, offering innovative, sustainable, and cost-effective solutions for projects of all sizes.
We are no longer just scratching the surface of what C-PACE can achieve. We are witnessing its real-time evolution—at precisely the right moment for the industry to embrace it for the climb ahead.