The shift in real estate lending: private credit steps in as banks step out

Private markets have enjoyed a period of unprecedented growth in recent years, one that continues to accelerate. Between 2010 and 2019, the annual growth rate was 12%. Between 2020 and 2022 this doubled to 23% and the market is forecast to reach $2.3 trillion by 2027, according to Preqin.

For fund managers, this shift is not just about opportunity. It is about readiness. They must now navigate a more competitive landscape, meet rising investor expectations and manage increasingly complex data and operational demands. Success will depend on their ability to evolve, innovate and execute with precision.

Consequently, fund managers must be prepared to transform their own operations and rely more on their service providers to benefit from what could be an unprecedented time of opportunity for private credit funds.

We talk to a portfolio manager at a global private equity investor with approximately $108bn of funds under management and a technology expert in the private credit space about the state of the real estate credit funds market, the future prospects and the operational implications ahead.

What is driving the involvement of private credit in real estate?

Since 2020 there has been a renewed interest across private credit in real estate fund management. Fundraising in this sector has nearly quadrupled in the last 15 years, from around $8bn per year between 2009 and 2011 to nearly $31bn between 2023 and 2024.

Deal making has been subdued in recent years thanks to the uncertainty caused by geopolitical and macroeconomic volatility. However, growth looks set to continue thanks to a combination of debt that needs to be refinanced and abundant dry powder seeking new investment opportunities. In the US alone, there is more than $6trn in commercial real estate debt outstanding.

According to Niraj Shah, Partner and Global Head of Credit at Harrison Street Asset Management, monetary policy has also been a factor, especially in the US. “Rapid rate hikes have reshaped real estate valuations and driven up borrowing costs,” he says.

“As a wall of maturities approaches, some sponsors are struggling to refinance, fuelling demand for private credit. In addition, with $4.5 trillion of commercial real estate debt maturing by 2028, private credit is stepping into a critical role in the capital stack.”

According to Mahen Surnam, Vistra’s head of Loan Market Solutions, investors are also looking for alternatives to a fixed income market suffering due to inflation, low interest rates and geopolitical uncertainty, and similarly suppressed equity markets.

“Real estate is a way to expand your portfolio to get a better return. Of course, there is a risk return equation to consider but there are investors out there that want to explore what is available globally and maximise their return,” says Surnam.

Where are the gaps in lending currently?

A number of regional banks have stepped back from the real estate market and while larger institutions are re-entering, it is with a strong emphasis on credit quality. They are now focusing on higher quality assets with lower debt service coverage ratios and loan to value ratios.

Liquidity may be returning in top-tier markets but there are significant lending gaps in lower quality office space, says Shah. It is a similar story in the retail market. “While there is enthusiasm around strip retail and grocery anchored retail, it is much more difficult to secure loans for class B malls and other lower quality retail assets,” says Shah.

The lending gaps are indicative of the different risk and return profiles favoured by banks and debt funds respectively. “Banks have become more conservative in their lending with a greater focus on credit quality and in-place cash flows, whereas debt funds are willing to take on more risk and to go deeper into the capital structure,” says Shah.

This has allowed alternative lenders such as private credit funds to continue filling the void. Between October 2023 and October 2024, commercial real estate loan volume originated by alternative lenders increased by 34% while traditional bank-based lending fell by 24%.

Banks are also operating under more regulatory scrutiny than debt funds, adds Vistra’s Surnam. “For example, banks have more planning requirements before they can release the money which can be a hurdle to transactions progressing. Fund managers can move quicker and more spontaneously which is what investors are looking for.”

Debt funds have also been helped by an influx of capital from insurance companies in search of higher yields. The extra capital has enabled debt funds to offer more competitive pricing than traditional lenders. As a result, Shah believes debt funds will soon account for as much as 25% to 30% of overall lending volume.

Shah also expects debt funds to remain committed to the real estate market. “They are not just opportunistic lenders looking for mid to high teen returns. The capital is here to stay,” he says. “For most debt funds, there is a diversified investor base and lending vehicles that go up and down the capital stack, from senior loans to mezzanine debt to preferred equity.”

What is the economic outlook for the real estate market?

The last two years have been marked by significant economic headwinds, the lingering effects of a prolonged cycle of US interest rate hikes, loan maturities and geopolitical volatility, all of which have impacted the risk return profile for private credit and real estate funds. “We have seen a significant increase in cost and cap rate pressure due to rising interest rates and the large volume of loans maturing over the next few years, which will require additional equity infusion and loan paydowns,” says Shah.

Tariffs on construction materials like steel and aluminium will further impact costs, slowing down new construction and sparking increased transactional activity in existing real estate assets.

Meanwhile, the regulatory landscape continues to favour the growth of private credit. The Basel III requirements that were implemented in January 2023 have constrained banks’ ability to provide real estate financing, particularly in construction lending and transitional property financing.

According to Shah, players in the private credit market are likely to see less rather than more regulation in the US under the current administration. This should allow debt funds to continue to innovate but may also allow banks to be more aggressive and competitive in their lending activity.

However, the fact that it is near impossible to dissociate politics from the current regulatory environment means that market participants will have to monitor the political developments closely, not least the mayoral elections facing most US cities in the next quarter which could impact the multi-family sector due to concerns around affordability.

Furthermore, enforcement actions have become more common since the end of pandemic-induced lockdowns when there was understandably more leniency towards default scenarios, says Surnam.

According to Shah, refinancing activity and transactional volumes will pick up over the next 6 to 12 months, driven by imminent loan maturities and continued rate cuts. And with a number of loans maturing, there might be opportunities for new credit vehicles, bridging loans and development funds, adds Surnam.

Market participants will also have to monitor ongoing geopolitical volatility and the prospect of ongoing or escalating conflicts as well as the rates environment in the US and abroad. But the overall sentiment is that private credit is here to stay and we could be entering a golden era. As Shah says: “For investors who can be selective, the next cycle could offer some of the best risk adjusted returns in real estate credit.”

What operational considerations are there for market participants?

The prospect of another boom for private credit funds in the real estate market will have several operational implications for all participants and will require more due diligence around the choice of service providers.

• Investors should look for core competencies from their credit fund managers such as ability to service the loans, a well capitalised balance sheet, a responsive customer service team and experience of dealing with default scenarios. As Shah says: “We have been through a few cycles now where a lender may have to step in and take ownership of the asset. So it is important that they have both the capital and the expertise to intervene when needed because there is a difference between managing a credit position and owning and executing a business plan.”
• Debt funds should ensure they are operationally efficient. As competition intensifies, success will depend on the ability to provide bespoke financing options as well as a range of data driven services, from performance reporting to benchmarking and beyond. As Surnam says: “Investors are demanding real time information and performance tracking through dashboards and apps. This was not the case six to seven years ago in the first wave of private credit.” This will mean greater reliance on third party service providers. But there are also steps that can be taken internally such as decommissioning legacy technology and using the cloud for data storage.
• Fund administrators are under increasing pressure to provide end to end services and access to real time data so that debt funds can properly service their investors. Service providers must therefore be flexible and adaptable to meet these demands. And they must invest in technology, be that via their own platforms or through partnerships with specialised tech providers.

These steps are not as straightforward as they may appear. They all require investment in technology and working with data. Data in the private credit sector is less standardised and harder to source than in mainstream markets. This creates challenges when it comes to assessing or benchmarking fund performance.

There is evidence of progress. The G L2 index developed in 2018 as a data standard now tracks US investments with underlying collateral in excess of $355 billion and as of April 2025 includes 15 years of monthly performance data.

“When a debt fund is promising mid to high teen returns compared with another strategy offering less, investors need to remember it is never an apples to apples comparison,” says Niraj Shah. “How a fund uses leverage or relies on the capital markets matters enormously when evaluating real estate credit strategies. We have historically been untethered yet often get compared to highly leveraged funds, which can be misleading. It is never going to be perfect but the development of benchmarks and indexes is at least giving investors better tools to make informed comparisons.”

Similarly, processes are not as mature in the private credit space as they are in more mainstream markets such as equities, fixed income and traditional asset management.

Therefore, it will require a transformational effort for some fund managers who have relied on outdated manual processes to manage their private credit portfolios. Legacy systems have to be decommissioned. Modern cloud based data management systems need to be considered. And closer partnerships with third parties need to be cultivated. The private credit industry remains and will continue to be relationship driven but these relationships can only flourish if firms adopt a tech infrastructure and operating model that is fit for purpose for the market of the future.