What you need to know: Banks have become more selective about lending for commercial real estate, and this has resulted in private lenders having a bigger role in the market today. With private credit from direct lenders like Private Capital Investors, you can get more flexible and faster financing that’s especially useful for transitional properties and complex CRE deals.
Look at commercial real estate lending today, and you’ll see just how much it has changed from how it worked before. Banks are still central to the CRE industry, but they’re not always the first choice or the preferred source of funding anymore. Changes in regulations and lending conditions have expanded the range of financing options for CRE borrowers.
Why are banks taking a back seat?
Banks have traditionally provided a large share of CRE financing. However, stricter capital and liquidity requirements after the financial crisis made them more careful about financing deals for unstabilized properties and for borrowers who need more flexible loan terms.
This change started mainly when, after the Global Financial Crisis, Dodd-Frank and Basel III raised the amount of capital banks had to hold against riskier assets. Those dynamics made commercial real estate lending more capital-intensive for banks, particularly for higher-risk loans. More recently, the banking turmoil of 2023 pushed risk management higher on the agenda, just as CRE was dealing with its own post-pandemic problems (especially in the office sector). Failures of banks such as Silicon Valley Bank and First Republic Bank made regulators and lenders look more closely at balance-sheet risk.
The bottom line: You may have a better chance of securing financing from a bank if your project involves a stabilized property with strong cash flow and a lower loan-to-value ratio. But if you’re financing a transitional property or your deal is a little more complicated, you may have a harder time finding financing that accommodates the deal as it is. It may be better to work with direct lenders if the property has solid underlying value and if you have a strong exit plan.
What other financing options emerged as banks pulled back?
CRE borrowers increasingly look beyond banks to alternatives: commercial mortgage-backed securities (CMBS), government-backed CRE loans, and private credit.
What are CMBS loans?
A CMBS loan starts as a commercial mortgage made by a lender, much like other CRE loans. The mortgage can then be combined with other commercial loans and turned into securities for the capital markets.
Note that as a borrower, you don’t borrow “from CMBS” directly. A lender originates the commercial mortgage, and that loan may later be pooled with other mortgages and securitized into commercial mortgage-backed securities.
CMBS acquisition loans are generally more common for stabilized, income-producing properties with predictable cash flow. They tend to be less suitable for transitional properties that need major renovation or lease-up.
If you need to modify your loan, you may have to work through a master or special servicer. That can make modifications more complicated and time-consuming. CMBS lending can also react to changes in public capital markets, so market volatility can affect your financing conditions.
What are government-backed CRE loans?
Government-sponsored enterprises such as Fannie Mae and Freddie Mac can help in financing multifamily properties. These loans are generally used for stabilized multifamily properties that meet agency requirements. Approved lenders originate and process the financing under the applicable agency program.
The catch is that agency financing only works for certain types of deals. You may get competitive rates and longer repayment terms if your property qualifies, but a transitional office building or hotel may fall outside those requirements. In that case, you’ll need to look at other financing options, such as direct lending or private credit.
What is private credit and how did it become a bigger part of CRE lending?
Private credit works differently from traditional bank lending, and it’s precisely this departure from conventional underwriting that makes it worth considering.
Instead of mainly using customer deposits or raising money through public bond markets, private credit sources capital from institutional and other qualified investors. That could include anything from pension funds and endowments to sovereign wealth funds and insurance companies.
The fund then lends that money directly to you based on its investment strategy.
Direct lending, which is what we do here at Private Capital Investors, is one of the core lending models within private credit. This type of financing can be especially helpful when you’re renovating property or looking for a bridge loan until you can arrange longer-term financing. Private direct lending can also be useful when you need to close an acquisition quickly.
Faster and more flexible
When you can’t wait months for financing, private lenders can offer more flexibility and speed. They generally don’t follow the same approval processes or face the same balance-sheet restrictions as banks, so they may be able to close your loan in around 30 to 45 days. Moreover, private lenders can structure your financing with approaches like mezzanine debt or preferred equity when a standard senior mortgage doesn’t meet the project’s needs.
Working alongside banks
Private credit won’t necessarily replace banks. In many cases, they can work together.
A bank might provide funding to a private credit fund while the private lender originates and manages your individual loans. With this arrangement, banks can give you the capital while a private lender takes care of specialized underwriting and more complex financing structures.
How do direct private lenders compare to traditional lenders?
| Factor | Traditional Banks | CMBS / Agency | Direct Private Lenders |
|---|---|---|---|
| Capital Source | Customer deposits and other bank funding | Public markets or GSE funding | Institutional and private fund capital |
| Regulatory Environment | Extensive banking regulation | Securities, program, or government requirements | Fund mandates, lending laws, and contractual requirements |
| Execution Speed | Often longer approval process | More standardized process | As fast as 7 days |
| Structuring Flexibility | Generally follows established bank requirements | Typically standardized | More flexibility for complex deals |
| Underwriting Focus | Cash flow, borrower strength, collateral, and guarantees where applicable | Property performance and eligibility | Property, borrower, collateral, exit strategy, and business plan |
Find out how a direct lender can help you
At Private Capital Investors, you can access capital for commercial real estate properties through our lending partners. Our direct private lending solutions can help you finance acquisitions and address short-term capital needs.
Talk to us if you want to expand your CRE portfolio. Email info@privatecapitalinvestors.com or call 972-865-6205.
Sources:
- https://origininvestments.com/how-private-lenders-are-reshaping-commercial-real-estate-financing/
- https://getbuilt.com/blog/cmbs-lending/
- https://yieldstack.ai/blog/private-lenders-debt-funds-vs-banks-cre
- https://www.pimco.com/gbl/en/resources/education/understanding-securitized-products
- https://alterdomus.com/insight/private-debt-vs-bank-lenders/
- https://www.ssga.com/us/en/intermediary/insights/what-is-private-credit-and-why-investors-are-paying-attention
