If you manage or finance commercial real estate, private credit could potentially give you a financing route outside the traditional bank system.
Private markets have been so awash with institutional capital that between 2010 and 2019, annual growth reached 12%, and between 2020 and 2022, that rate doubled to 23%.
Forecasts show that this non-bank credit market is on its way to reaching $2.3 trillion by 2027.
Real estate credit seems to have followed the same pattern: fundraising in the sector more than quadrupled from around $8 billion per year between 2009 and 2011 to nearly $31 billion between 2023 and 2024.
What does private credit mean for your CRE financing?
Private credit is an alternative way to borrow money for commercial real estate if traditional banks either (1) aren’t comfortable with the risk of your deal or (2) aren’t fast enough to meet your deadline.
Banks must operate within strict liquidity and regulatory rules, so they often judge a CRE loan application by whether it fits their internal lending limits.
Private lenders are, in contrast, much freer to underwrite assets because they do not lend from a regulated deposit base.
They instead raise capital from institutional investors and then lend that money directly to CRE borrowers through private debt vehicles.
These lenders also often have a lot of experience in CRE; they can look beyond the current trailing numbers and assess whether the asset’s next stage of income is realistic.
So even if your property needs lease-up or renovation before it qualifies for conventional refinancing, it’s possible to secure funding based on the asset’s current value and the income it can realistically produce once the business plan is complete.
Is a maturity date approaching, and your bank refuses to refinance at the proceeds you need?
A private credit lender may be able to bridge the loan.
This will give you time to stabilize the property. You’re not forced to accept a lower valuation or sell under pressure.
Of course, you will be paying a premium for speed and convenience.
Interest rates are higher, but a private lender can often close in 10 to 14 days compared with 30 to 45 days (often longer) for a bank loan.
The extra interest may be worth paying to save the deal if you’re in a rush.
Why is private credit rising?
More CRE deals are being funded by private lenders because banks are much more cautious due to regulations changing the economics of CRE lending.
Regulators have required banks to hold more capital against higher-risk assets since the 2008 financial crisis, resulting in commercial real estate loans being scrutinized more closely.
The more recent spate of regional banking failures in 2023 also made regulators and bank credit committees more sensitive to CRE exposure, especially where falling property values could weaken the loan collateral.
These capital rules and credit concerns have made many banks much more selective about new loans and refinancing requests — they might lower the proceeds or tighten covenants to the point where the financing no longer works for the deal, or simply walk away from deals that would have been financeable a few years ago.
Is private credit more expensive?
Private credit costs more because the lender is taking on complexities that banks avoid.
The higher rate is not ideal, but sometimes the cost of waiting is worse: if you’re trying to close a time-sensitive deal, for example, or if your maturity date is almost here.
Delays in these situations can strip away your negotiating room and force you to accept whatever capital is available at the last minute.
Private credit is also often the best way to fund properties that don’t look fully stabilized right now, but clearly have the potential to earn stably.
For example, you can use a bridge loan while you complete renovations and/or build strong occupancy.
So while it’s true that private credit is more expensive than bank debt, that extra cost protects more value than it consumes.
What CRE segments attract private credit?
Private credit is widely available for multifamily CRE because housing demand tends to hold in most markets.
It’s also fairly straightforward to secure private credit for industrial and logistics assets such as warehouses and distribution properties, as well as data centers and AI-related infrastructure, as demand in these hyper-growth segments is expected to continue growing in the next few years and almost double by 2030, by some estimates.
How do private lenders judge CRE deals?
Many private lenders focus on 60% to 70% LTV and will look closely at three things: cash flow, sponsor strength, and exit plan.
Can the property cover the loan through current income or near-term stabilization?
Can you refinance or sell before the loan term runs out?
In the eyes of private lenders, the answer to these questions often matters much more than an optimistic but unsupported story about market potential.
They want proof that the collateral can at least have retail value and that your business plan can survive the current rate environment.
Is your asset transitional?
Then your exit strategy is even more important. The lender will want to see how you intend to use bridge financing to raise NOI enough to qualify for refinancing.
Don’t wait until you’re just a few weeks away from the maturity date before speaking with private lenders.
Build those relationships earlier: learn how these lenders underwrite the type of asset you are looking to finance, so you can prepare your application and explain the income path before the deadline controls the conversation.
It’s also important to choose a lender that understands CRE and can read the property beyond a standard credit checklist.
Talk to Private Capital Investors about CRE financing structured around your property’s cash flow and exit plan.
Sources
- https://www.vistra.com/insights/shift-real-estate-lending-private-credit-steps-banks-step-out
- https://collateral.com/blog/private-credit-real-estate-financing
- https://www.garp.org/risk-intelligence/market/five-areas-watch-250417
- https://www.perecredit.com/asset%E2%80%91based-finances-evolving-role-in-real-estate-private-credit/
- https://www.jll.com/en-sea/insights/market-outlook/data-center-outlook
